Posts tagged ‘Share Insurance Fund’

Is the Fed Squeezing Small Lenders Out of Existence?

Good Morning, folks.

In the 1930’s the Federal Government responded to the collapse of the farming industry by putting in place a government back framework meant to stabilize the farming industry and stem the impact it was having on everyday Americans. Today, the family farm is largely a relic of a bygone era but the government subsidies designed to keep it alive are still alive and well and disproportionately benefiting larger corporations that don’t need the money.

Many of the same trends are taking hold in the banking industry to the detriment of credit unions.

I’m not going out on much of a limb here to say that you should expect your credit union to have to pay more into the Share Insurance Fund in approximately six months. That’s my takeaway from NCUA’s report on the Share Insurance Fund provided at yesterday’s monthly board meeting. It is also the assessment of one Todd Harper who put credit unions on notice that “absent some unknown external event, these forces seem likely to eventually” push the equity ratio below the 1.20 level at which point NCUA must pass around the Share Insurance Hat.

This unfortunate development isn’t all that surprising. This past week many New York credit unions have had the opportunity to listen to Steve Ricks pithy overview of current credit unions economic trends. Members are stocking away savings at unprecedented levels thanks to all of that government stimulus spending. The bad news is that loan demand isn’t keeping pace and investment returns are non-existent. Put this all together and you have the profits of many credit unions, particularly smaller ones, being squeezed even more than they have been in the past. Perhaps as the economy picks up even more, so will loan demand. We will have to wait and see.

But let’s take a look at the big picture. The trend we are seeing is nothing more than the continuation of forces put in place by the Federal Reserve more than a decade ago. When the mortgage meltdown looked as if it might trigger a depression, even Janet Yellen explained that, while she was empathetic to the difficulties faced by community banks, the economy as a whole benefitted from the stimulus resulting from historically low interest rates.

At the time this argument made sense. But by continuing to take extraordinary steps to suppress interest rates, the Fed’s intervention is feeling more like a permanent lifeline to large banks then a short-term necessity. As someone who believes in the free market this doesn’t feel like a fair competition.

May 21, 2021 at 12:48 pm Leave a comment

NCUA is doing the right thing when it comes to assessments

As blog followers know, there are occasions when I like to remind everyone that the opinions I express are mine and mine alone. This is one of those times.

The NCUA Board has created a low-level stir within the industry by suggesting at its meeting last week that it may have to seek an assessment from credit unions to make up for shortfalls in the share insurance fund caused by the sudden infusion of deposits triggered by the pandemic. NAFCU even wrote this letter to the Board urging it to hold off on any assessments and instead consider increasing the range of investments that credit unions are allowed to make. 

In fact, the Board did exactly the right thing by publicly discussing the share insurance fund. Credit unions should hope for the best but prepare for the worst, and begin preparing now for an assessment in the coming months. 

First let’s make sure we’re all on the same page. As a matter of federal law, NCUA must impose a restoration plan if the equity ratio falls below 1.20%. Federal law also permits NCUA to establish a Normal Operating Level of between 1.20 and 1.50. 

The facts don’t lie. According to the NCUA, the Share Insurance Fund equity ratio has dropped to 1.22% as of June 2020. The primary reason for this sharp decrease has of course been an almost 13% growth in insured shares. The current ratio is well below the NCUA’s Normal Operating Level of 1.38%. But the numbers aren’t as bleak as they first appear. In October, the fund will receive an infusion of $1.5 billion from insured credit unions as part of their annual contributions. 

Strip away the numbers and what you have is yet another debate over just how long lasting the economic downturn is going to be. If you believe that the indestructible mortgage industry is going to continue to rumble along, that the unemployment numbers will continue to defy conventional wisdom and continue to decrease, and that members will be well positioned to pay back forbearances as a vaccine replaces the new normal with a real normal, then it makes sense for NCUA not to prematurely impose additional assessments. 

In contrast, if you are inclined to believe, as many officials at the Federal Reserve are, that the economy will peter out without further congressional stimulus, that a sizable number of forbearances will never be repaid, and that we may very well see a second wave of COVID economic lockdowns in the coming months, then NCUA would be derelict in it’s duty not to protect the share insurance fund. Incidentally, the FDIC has already had to impose a restoration plan on banks.  

September 24, 2020 at 9:36 am Leave a comment

Will Medallion Losses Impact Potential Payout?

This one goes into the ‘don’t shoot the messenger’ category. NCUA’s agenda for this Thursday includes a discussion of its decision to merge the Corporate Stabilization Fund into the traditional Share Insurance Fund. When NCUA announced that it was deciding to do this last year, it was estimated that between $600 and $800 Million dollars could be available for return to individual credit unions.

Now for the part where I don’t want you to get too angry with me: NCUA made this announcement just as the value of medallion loans was sinking lower and lower. Clearly we are reaching a point where this could have a direct impact on the Share Insurance Fund. Most notably, the recently released 4th Quarter performance reports indicated that Melrose Credit Union’s net worth to total assets had tumbled to a   -13.79 in December from -5.10 in September.

In a worst case scenario, medallion losses could wipe out any windfall otherwise recognized from folding the Corporate Stabilization Fund into the Share Insurance Fund. One of the things I’ll be listening for at Thursday’s meeting is the extent to which NCUA has already taken these potential costs into account in debating what the appropriate premium for credit unions should be and what the appropriate size of any rebate should be as well.

More ADA Lawsuits

I don’t want credit unions to think that they are the only ones being subjected to ADA website lawsuits. Here is some information about two of the most recent ones I have spotted. In Gathers et al v. 1-800-FLOWERS.com, Inc. a Federal District Court Judge in Massachusetts recently denied the company’s request to have its ADA lawsuit dismissed. A second case is Kiler v. Rag & Bone Holdings, LLC. I haven’t had a chance to read the complaint yet but according to Law360, the lawsuit is bringing claims not only under the Federal ADA but New York State law as well. This could be an important development…

Speaking of websites, it is being reported that the NCUA is beginning to conduct website audits as part of examinations. If you’ve been subject to one of these, the Association would love to hear about it so that your pain can benefit others. On that note, kumbaya and enjoy your day.

February 13, 2018 at 9:28 am Leave a comment

Five Things You Need to Know This Friday

With apologies for the late start, here are five things you need to know:

Show Me the Money 

As you probably already know, at yesterday’s board meeting, the NCUA announced that it was closing down the Temporary Corporate Credit Union Stabilization Fund on October 1, 2017 The decision sets the stage for credit unions to see a rebate of between $600 million and $800 million in 2018.

Now for the bad news: NCUA is forging ahead with plans to raise the Normal Operating Level to 1.39%. Under federal law, NCUA can set the Normal Operating Level anywhere between 1.20 and 1.50 provided that any funds in excess of the NOL are returned to CUs.

In his statement, Chairman J. Mark McWatters broke down the 1.39 rationale this way

There are three key risks to the equity ratio for which the 1.39 percent normal operating level accounts. Specifically, the 1.39 percent level accounts for the following:

  • Four basis points to reflect the risk posed by the remaining obligations of the Corporate System Resolution Program;
  • Two basis points to reflect the projected decline in the equity ratio through 2018 that will occur even without a recession; and
  • 13 basis points of protection for risks to the equity ratio posed by insured credit unions.

GOP Tax Plan Takes Dead-Aim at NY

 Credit unions in states with high local and state taxes—I’m talking to you New York, New Jersey and Connecticut—have more to more to worry about then protecting the credit union tax exemption as Congress debates tax reform. The tax cut blueprint announced by GOP leadership earlier this week ends the deductibility for state and local taxes. In addition, by doubling the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers, members will find it less attractive to itemize for the mortgage interest deduction. This could impact the mortgage businesses, particularly downstate.

By the way, contrary to popular belief, New York State gives a lot more money to the federal government than the federal government gives to New York State.

Advertising Relief

The Share Insurance Fund wasn’t the only thing on the minds of the NCUA yesterday. It also released proposed regulations amending signage requirements. OK, this might not be the most exciting thing in the world, but it does affect what goes into your advertising disclosures.

Association Testifies On Data Breach Solutions  

 In the aftermath of the Equifax Data breach, the State Senate’s Consumer Protection Committee held a hearing to examine steps that could be taken to strengthen consumer data protections. The Association was among those groups invited to testify. Our key points were:

  • We need baseline security standards for all businesses that hold large amounts of consumer information.
  • The Legislature should not impose additional obligations on financial institutions such as credit unions, which have been taking steps to prevent identity theft for more than a decade.
  • Consumers and credit unions need the right to sue businesses for the direct and indirect costs of data breaches.
  • More needs to be done to enhance consumer education in schools.

Why Dentists Are the Best Marketers In The World

 The brilliance of the dental industry is that it has figured out a way to have parents pay thousands of dollars for the right to inflict medieval treatments on their children that would make an inquisitor squirm. My eight year-old recently got an expander, which, as far as I can tell, is the equivalent of sticking a pair of pliers in your kid’s mouth for a couple of years and seeing what happens.

On that note, have a nice weekend.

September 29, 2017 at 11:15 am Leave a comment

Puerto Rico’s Debt Crisis and Credit Unions

The impact that Puerto Rico’s decision to renege on paying a $58 million debt payment has a unique impact on credit unions that service the Island Commonwealth.

There are approximately 116 credit unions on the Island of Puerto Rico. Crucially, Puerto Rico has its own cooperative share insurance system, meaning that the hit suffered by these credit unions which reportedly purchased more than $1 billion in bonds backed by the Puerto Rican Business Development Authority shouldn’t impact the Share Insurance Fund. There are 12 Puerto Rican credit unions that are federally insured, but NCUA recently issued a statement saying that the fund shouldn’t be impacted by Puerto Rico’s fiscal woes.

More generally, the Puerto Rican debt crisis has put a spotlight on credit union practices. In yesterday’s New York Times, an article describing the impact that the bond default is having on average citizens prominently featured the plight of credit unions and is worth quoting extensively.

Until 2009, the credit unions could invest only in the highest-rated bonds. But local regulators made an exception as long as the credit unions invested in Puerto Rico bonds.

As a result, the credit unions went from owning zero Puerto Rico bonds to holding about $1.1 billion worth today. And nearly half of the credit unions’ holdings is concentrated in debt issued by the island’s Government Development Bank, which has served as an emergency source of cash for the commonwealth. Because of concerns that the Government Development Bank may soon default, its debt trades as low as 29 cents on the dollar — raising fears in banking circles that losses on the credit unions’ holdings could force some credit unions to limit their lending.

A local banking regulator, Daniel Rodríguez Collazo, said the credit unions had enough cash to absorb any blow. Still, they are working with the government to restructure their holdings in ways that would minimize their losses.

Not surprisingly, the crisis has also not escaped the watchful eye of the ever vigilant, albeit semi-retired Keith Leggett. In a recent blog on the subject, Keith pointed out that the financial problems faced by these credit unions are exacerbated by the fact that they purchased some bonds from the Public Finance Group, a public authority. Unlike general obligation bonds, these bonds are paid out of appropriations made by the Puerto Rican legislature. Needless to say, that body doesn’t seem to be in much of a mood to be bailing out creditors.

August 10, 2015 at 6:38 am Leave a comment

Matz to Home-Based CUs: Drop Dead

With the tone of a parent anxious to get their free-loading college graduate to get his own place, Chairman Matz proclaimed Friday in an interview with CU Times that the days of the erstwhile home-based credit union are over.  Not withstanding the fact that the regulation requiring existing home based credit unions to find office space within two years is still pending, Matz told CU Times that as credit unions grow “I don’t think there is any justification for having a financial institution in somebody’s house.  I really think those days are over.”

As for those of us who believe that home-based credit unions are an important part of credit union history, Chairman Matz said, basically, what’s your point?  She stole one of my favorite metaphors when she pointed out that even though the “buggy whip was useful in its time, it’s not useful anymore. . .”

A few quick thoughts:

  • Of all the issues for NCUA to get fired up about, why, why, why is the Chairman so fired up about home-based credit unions?  There are approximately 7 such credit unions in New York State and nationwide, they represent a miniscule fraction of the industry.  Does their continued existence seriously pose a threat to the safety and soundness of credit unions?  If so, the industry is in much worse shape than I thought.
  • Do home-based credit unions really pose a safety threat to examiners?  Of course not.  Unless there is an epidemic of people setting up home-based credit unions so they can prey on examiners, this argument strikes me as somewhat paranoid.  To the extent that examiners simply feel that someone’s home is not the proper place to be doing an audit, then simply pass a regulation giving examiners the authority to mandate that examinations take place outside the home, perhaps at NCUA headquarters or another credit union. 
  • Is history a good enough reason to keep these credit unions open?  You bet it is.  Chairman Matz misses the point.  If the vast majority of credit unions were still using the financial equivalent of the buggy whip, then this regulatory eviction would be long overdue.  But the vast majority of credit unions moved out of houses decades ago.  By allowing home-based credit unions to remain there, NCUA allows the industry to maintain one of the most important symbols of its unique structure and evolution.  I think it is great to be able to tell people that the cooperative structure is so simple that a group of neighbors, church members and family members can bank out of their homes if they so choose. 
  • Is there a legitimate safety and soundness concern?  Chairman Matz comes across as a tad heavy handed in dismissing the home-based credit union.  Ultimately, it’s not for her and her fellow board members to decide what office space best reflects the professionalism of the industry but whether home-based credit unions pose a risk to the beloved Share Insurance Fund.  To the extent individual credit unions, whether they are operating out of a cutting edge office park or Uncle Bob’s basement, are not conducting their business consistent with safety and soundness, then regulators have every right in the world to clamp down on their practices.  But to categorically say that an entire type of credit union should be done away with is an abuse of regulatory authority that all credit unions should be concerned about.  Besides, I think it’s great that there are still some credit unions out there whose employees can start their day in their bathrobes with a cup of coffee.  On that note, off to work.

April 7, 2014 at 7:49 am 2 comments

What’s The Big Idea?

Yesterday, the NCUA proposed the most far reaching revisions of credit union risk based net worth requirements since they were originally promulgated at the beginning of the last decade. Given the complexity of the issue and the fact that every credit union will be affected differently, it is far too early to give this proposal a thumbs up or thumbs down. But given NCUA’s aggressive use of its authority to create risk-based net worth requirements to deter what it perceives as safety and soundness risks, this proposal will undoubtedly keep more than a few credit union CEOs and CFOs up at night. The changes would take effect 18 months after final approval.

Risk based net worth generally attempts to gauge the stability of a financial institution’s assets by weighting the risk posed to financial institutions in the event of financial trouble. So, for example, cash on hand is not counted against an institution’s strength at all, but member business loans would be. The system is already used by banks and NCUA is putting forward this proposal, in part, to harmonize credit unions with other financial institutions.

First, the good news. This proposal would only affect credit unions with $50 million or more in assets. Second, it is possible that for those of you with a conservative asset composition, the new asset weighting system proposed by NCUA will actually result in your credit unions having to put aside less, not more, capital.

Now for the potentially bad news. As explained by NCUA in the proposal’s preamble, credit unions usually have quality capital; however, the Share Insurance Fund has lost hundreds of millions of dollars due to the failure of individual credit unions holding inadequate levels of capital. According to NCUA, “examiners did warn officials at these credit unions that they needed to hold higher levels of capital to offset the risks in their portfolios, but the credit union officials ignored the examiner’s recommendations, which were unenforceable. This proposal seeks to incorporate the lessons learned from these failures and better account for risks not addressed by the current rule.”

How would the proposal do that? By greatly expanding the use of weightings to better assess the ability of a credit union to absorb potential losses. For instance, NCUA has expressed a concern about excessive concentrations of MBL and mortgage loans on credit union balance sheets, so under the new proposal, credit unions would have to assign a 100% “risk-weight” to member business loans of less than or equal to 15% of assets but a 150% “risk-weighting” to any business loans greater than 15% of a credit union’s assets. For those of you who want to take a closer look, the suggested categories with their accompanying weightings begin on page 138 of NCUA’s draft.

. . . . . . . .

Net worth requirements wasn’t the only issue that NCUA dealt with at its meeting. First, it extended until September 10, 2015 the 18% maximum loan interest rate for federal credit unions. It also finalized a rule permitting credit unions with $250 million or more in assets to apply for authority for limited use of derivatives solely as a hedge against interest rate risk. The rule also permits credit unions under that threshold to exercise this authority with regulatory approval. The final rule expands the number of derivatives originally proposed that can be utilized by credit unions to include, for example, interest rate caps and interest rate floors.

I’m not much for Westerns, but whenever I think of derivatives I think of the movie Shane. Alan Ladd plays a gun slinging good guy who protects the town from a bunch of ruffians while gaining the admiration of an impressionable young boy and his pacifist mother, who despises guns. At one point in the movie Shane explains that a gun is a tool, as good or as bad as the man who uses it. That’s pretty much the way I feel about derivatives. By allowing financial institutions to trade one expected revenue stream for another, derivatives makes sense and actually enhance financial stability if used properly. I’m glad NCUA finalized this proposal and now its up to eligible credit unions not to abuse the privilege.

Happy trails.

January 24, 2014 at 8:38 am Leave a comment

4 Things To Ponder On Election Day

1)  News flash. . .interest rate gyrations affect the residential housing market.

The recently released Survey of Senior Bank Loan Officers confirms what common sense would tell you.  The 100 basis point climb in mortgage interest rates in anticipation of the FED’s potential tapering of its bond buying program had a large impact on mortgage refinancing.  More than 90% of survey respondents reported that they have recently received moderate to substantially lower volumes of mortgage refinancing applications relative to what they were receiving in the Spring.  The survey also provides more evidence for the “new normal club” of which I am a member.   The economy is in the doldrums and I don’t see any reason to think that it is going to get wind in its sails anytime soon.  Very few of the surveyed bank officers reported reducing origination and processing fees, minimum down payments or FICO scores.

2)  The Wall Street Journal reports this morning that the Federal Housing Finance Administration (FHFA) will be following the lead of New York State and taking steps to curtail incentives to charge consumers high prices for forced place insurance.  The exact details are yet to be announced, but the paper reported that “rather than set rules on what insurers can charge for such policies, which is generally the purview of the states, the FHFA will prevent servicers that do business with Fannie Mae and Freddie Mac from accepting certain payments.”

I know I am very much in the minority on this one, but let’s keep in mind that there’s already a wonderful mechanism for members to avoid paying for forced place insurance:  it’s called paying your bills.

3)  It doesn’t make for the most exciting reading in the world, but NCUA’s Office of Inspector General (OIG), who acts as an omsbudsman within the Agency, released a report criticizing the decentralized manner in which the agency estimates losses to the Share Insurance Fund.  Most importantly, the OIG reported that the Agency’s Office of Examination and Insurance, Office of the Chief Financial Officer, and the Asset Management and Assistance Center documented different loan estimates throughout the year.  However, the OIG also found that everyone’s numbers were consistent by year’s end.  Translation, it sounds like the OIG has pointed to some bureaucratic overkill that could benefit from a streamlining of the NCUA’s process for determining losses to the Share Insurance Fund.

4)  Remember to vote today!  Several important state-wide propositions are on the ballot, including whether to legalize casino gambling in New York State.  And remember that the Town Board members we elect today may very well end up being the Assemblymen and State Senators we work with tomorrow (God Help Us!).  On that note, get out there and vote and remember, people died for your right to so, so driving a few minutes out of your way really shouldn’t be a big deal.

I’m getting off my high horse now, have a nice day.

November 5, 2013 at 8:27 am Leave a comment

To Survive, Credit Unions Need More Flexibility

imagesCA9YEVRIYesterday, the NCUA announced that it was closing down two credit unions, including Olean Tile Employees Federal Credit Union in Olean, NY and G.I.C. Federal Credit Union in Euclid, Ohio.  Both credit unions started in 1936 with the help of a healthy manufacturing employer to act as their sponsor.  With the demise of the sponsor, the credit unions died as well.  We hear these stories with such frequency that I think as an industry we have become numbed to them but, in fact, they reflect the single biggest trend taking place in the industry that we can do something about.

It’s time to get both state and federal legislators to update our enabling statutes and give all credit unions the flexibility they need to cater to an increasingly flexible economy.  The growth of credit unions reflects the growth of the American working class and unfortunately as the jobs that created that working class disappear, our industry has to change as well.  If we were creating an industry today we would not willingly tie our fate to enabling statutes that tie our growth to select employee groups or associations.  We would push for an expansive view of community as technology expands the size of a given area that any financial institution can serve.  Remember, not only are manufacturing jobs going away, but your average employee is now going to have several jobs in his or her career.  It’s getting harder and harder to classify employees as a distinct group of individuals.

CUNA has already worked with state-level lobbyist to update its Model Credit Union Act and it provides a ready piece of legislation to at least begin the discussion.  In fact, some associations have already successfully advocated for greater by-law flexibility so that their members can craft a membership base that reflects the unique conditions where they live and work.  For instance, it may make sense for a SEG-based credit union to become a community-based credit union that continues a commitment to a specific type of employee group that may be outside of the community.  Credit unions would still have to demonstrate that there is a need for their services.  They simply wouldn’t have to provide those services within an antiquated regulatory straight jacket.

NCUA Releases Share Insurance Fund Projections

In a letter to credit unions released late yesterday evening, NCUA projected assessments for the stabilization fund and the premiums for the insurance fund for 2013.  The combined total means that credit unions face an aggregate payment into the system of approximately 8-16 basis points.

December 18, 2012 at 7:55 am Leave a comment

What Can Be Gleaned From The Town Hall Meeting?

Yesterday, NCUA Chairwoman Debbie Matz and senior staff fielded questions from credit union personnel for an hour and a half.  Here are my takeaways.

It appears that the Board will decide at its November meeting that credit unions will not have to pay a share insurance fund premium next year.  But remember this is distinct from the assessment that credit unions pay into the Corporate Stabilization Fund.  The industry is currently committed to paying into that fund until 2021.

The agency is working on a guidance to clarify when a Document of Resolution should be issued as opposed to just an examiner finding.  In order for the guidance be successful, NCUA is trying to define when a credit union’s failure represents a material risk to the safety and soundness of the credit union.  Judging by the number of questions about examiners and examination procedures, as well as the perception among some credit unions that examiners are more aggressively issuing DOR’s than they had in the past, a more uniform definition would be in everyone’s best interest.

NCUA will be issuing guidance on expanded use of MBL exemptions.  While it would, of course, be better to see Congress raise the cap, NCUA can expedite the process by granting MBL waivers and reminding credit unions that such waivers are available.

As I pointed out in a previous blog, one of the real potential advantages to those credit unions with under $30 million in assets being classified as “small” credit unions for regulatory purposes-as NCUA proposed at its last meeting – is the possibility that NCUA will expand its plan to streamline the examination process for well functioning credit unions with under $10 million in assets to this larger class of small credit unions.  This may happen, and is certainly under consideration, but is by no means a done deal.

I was happy that someone asked for an update on NCUA’s consideration of authorizing the expanded use of derivatives by credit unions for the purpose of hedging against interest-rate spikes.  It seems to me that if you’re going to stress the dangers posed by interest-rate volatility, then you have to provide credit unions the financial tools to deal with the problem.  Properly used, interest rate swaps could help guard against too much exposure to long-term mortgages.  However, the speakers pointed out that the use of derivatives requires a degree of sophistication not only for the credit unions that would use them but for the staff that would be responsible for monitoring their use.  The bottom line is NCUA seems to recognize the benefit of these products, but is still trying to decide if the benefit is outweighed by the potential costs both to the safety and soundness of individual credit unions and the examination process for the agency.

Finally, the webinar talked about a legal opinion letter issued yesterday opining that NCUA may approve a credit union’s request to receive a change in its charter and subsequently merge with another credit union with the same type of field of membership.

Have a nice weekend, I’ll be popping back into your inbox on Tuesday.

 

October 5, 2012 at 7:10 am Leave a comment

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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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