Posts tagged ‘Share Insurance Fund’

There is an issue that has to be resolved other than the NFL referee strike.

In the rush of regulations being churned out by the CFPB one proposal that hasn’t gotten the attention it should deals with the authority that NCUA should be allowed to exercise over state-chartered credit unions.  If you’re a federally chartered credit union please keep reading:  you have a stake in preventing NCUA’s aggressive overreaching in the name of protecting the Share Insurance Fund.

You have until October 1, 2012 to comment on a proposed NCUA regulation which would allow the agency to make an independent assessment as to whether a federally-insured ,state-chartered credit union is  a troubled credit union under 12 CFR 701.14.  I’ve been highly complementary of NCUA’s recent mandate relief proposals.  But I am troubled by NCUA’s increasingly brazen disregard of state-level prerogatives in its obsession with protecting the Share Insurance Fund.  This regulation is the best example yet.

For more than 20 years, NCUA’s own regulations have stipulated that the agency will defer to state examiner CAMEL and CRIS ratings when determining whether or not a state-chartered natural person or corporate credit union should be considered a troubled credit union.  This is a designation you want to avoid.  If you are designated as a troubled credit union it means you have a CAMEL rating of 4 or 5 and NCUA can block any of your director appointments or executive hires.  NCUA is concerned that a 2%-4% variation among ratings by the federal and state regulators exists, meaning more state-chartered credit unions would be subject to this oversight but for the fact that NCUA must rely on state CAMEL ratings as opposed to its own.

For those of us who believe that the dual charter system is important for both federal and state credit unions, it’s time to tell  NCUA to stop categorically putting its concern for the Fund, no matter how far-fetched, above a state’s right to be the primary regulator of its financial institutions.  There are New York State credit unions that are subjected to both state and federal examinations.  Not only is this a waste of resources on the part of NCUA, but stories like these make a credit union think twice before considering the state-charter.

In this and other proposals NCUA is arguing that state-level examiners aren’t competent enough to be trusted.  Of course, NCUA doesn’t say that but why else does it suddenly feel compelled to stop relying on state examiner findings and take a closer look at rule-following credit unions that happen be state-chartered?

A lot of lessons can be drawn from the financial meltdown, but unless NCUA explains how things would’ve been better if only it was completely in charge, then it’s time for state regulators – maybe even New York’s Department of Financial Services – to point out that state examiners have an important role to play and within their jurisdictions are equal partners with their federal counterparts.

 

 

 

 

 

 

September 26, 2012 at 7:31 am Leave a comment

Five Questions You Should Ask Before Signing Any Contract

Earlier this month, Sperry Federal Credit Union in New York won an important legal victory.  A court ruled that CUNA Mutual Insurance was required to indemnify the credit union against losses it incurred when employees of the credit union’s mortgage servicer were found to have illegally sold the mortgages to the secondary market without Sperry’s authorization and pocket the sale proceeds.  The ruling is a hopeful sign for credit unions, both in and outside of New York, that have similar claims pending against CUMISS. 

With more and more credit unions using vendors for everything from account disclosures to ATM networks, the case underscores the importance of thoroughly reviewing and crafting contract language when you enter into third party relationships. In fact, this is an important component of the NCUA’s Due Diligence Guidance.  With the caveat that you should always get an attorney to review your contracts, here are some of the key components that should be addressed before you sign on the dotted line.

1)  What is the contract’s duration and how quickly can you get out of it?  I often see contracts with three year commitments and no escape clauses.  This should be avoided, especially when you are entering into a new relationship.  Make sure that the contract specifies what is expected of the vendor and gives you the right to terminate if the vendor can’t deliver.

2)  In the event the vendor makes a mistake, is it responsible for the consequences? Stock vendor contracts –especially those providing access to a specific product, limit the consequences of a vendor’s negligence by (a) disclaiming any representations that the service actually does what you’re paying it to do; (b) capping damages owed by the vendor; or (c) narrowly interpreting negligence.  Don’t underestimate how much a poorly executed contract can cost your credit union, particularly in the age of the data breach.

3)  Who is subject to the contract?  Vendors may subcontract all or part of what you are paying them to do and will often be responsible for carrying out multiple obligations.  Sperry won because the bond agreement was broad enough to cover illegal servicing activity.

4)  Which state’s laws will govern?  Contracts often stipulate where contract disputes can be litigated and under which laws.  Push for a clause that says the vendor is subject to litigating in your home state.   After all, it’s the vendor who wants your business and if they had their way you would have to hitch a ride on a dog sled in Alaska in order to get to court.

5)  Do you have the authority to monitor compliance with the contract?  Telling your member or an examiner that the vendor’s software miscalculated account balances isn’t much of a consolation.  Part of due diligence is insuring that someone periodically monitors a vendor’s performance and knows a contract’s terms, including when it ends.        

Guidance on Share Insurance Issued

NCUA has issued a letter informing credit unions that as of January 1, 2013 the temporary corporate credit union share guarantee will return to its pre-crisis maximum of $250,000.  Currently, all deposits in corporates are fully guaranteed.  The announcement not only means that credit unions should be preparing for life in their new corporates, but that we can soon expect NCUA to propose regulations for credit unions to access credit in the event of a liquidity crisis.  It has already issued an ANPR on this subject.

Agriculture Department Declines to Freeze Mortgage Lending

The New York Times is reporting this morning that the Department of Agriculture has decided not to halt loans for mortgages that include oil and gas leases pending an environmental review of the impact caused by hydraulic fracturing.  A ruling by the USDA that its mortgage subsidies provided to various communities under rural housing programs triggered an environmental review would have effectively placed a moratorium on oil and gas drilling, not only in New York but across the Country.

March 23, 2012 at 7:25 am Leave a comment

When the cure is worse than the disease

Yesterday, NCUA unveiled the first round of its systemic reform proposals intended to protect the Share Insurance Fund against future crises.  I’m afraid that NCUA is overreacting to the industry’s challenges and in so doing is in danger of imposing a cure more harmful than the illness.

Its most controversial proposal is to impose federal regulations on state charters engaging in loan participations.  Similar to its previous proposal  to mandate that CUSO’s be subject to direct NCUA oversight even though most of them are state-chartered corporations, the agency has clearly determined that the key to mitigating financial risk to the Share Insurance Fund is to take more direct control of regulating state-chartered credit unions.

So how is this an overreaction?  There have been thousands of pages dedicated to analyzing the root causes of the 2008 financial crisis.  I would defy anyone to show me one credible piece of evidence that the credit union industry or its practices contributed to the economic downturn.  Credit unions didn’t underwrite credit default swaps on the assumption that the real estate market never goes down; didn’t bundle securities loaded with liar loans and didn’t have great leverage ratios that made a mockery of the notion of collateral.  These are the type of systemic risks that regulators should guard against because certain institutions, because of their size and complexity, have the ability to bring down the entire economy.

As for the cure, to extrapolate from the economic downturn that participation loan oversight has to be strengthened is questionable, at best, since participations actually diversify risk.  In any event, what evidence does NCUA have that it can do a better job of regulating loan participations than can its state counterparts?  Doesn’t a division of labor makes sense at a time of government belt-tightening?  NCUA argues in its  proposal that state-chartered credit unions have a disproportionate number of poorly performing participation loans.  But one would expect an increase in bad loans during an economic downturn.  The real question is what proof does NCUA have that an inadequate state-level examination as opposed to a bad economy contributed to the problem?

A vibrant dual charter is one of the most important strengths of the credit union system.  If NCUA is allowed to eviscerate the state-charter in the name of the Share Insurance Fund, I am not at all convinced that member money will be better protected and positive that the most effective means credit unions have of seeking out the regulatory environment best suited to advance their growth will disappear.

December 16, 2011 at 7:18 am Leave a comment

Too big to fail is too big

I’ve been accused of being a glass half empty kind of guy, so let me say that I see some light at the end of the tunnel this morning.   First, at its board meeting yesterday, NCUA projected nettlesome but manageable assessments on credit unions next year in relation to the cost of the corporate bankruptcies and the replenishment of the Share Insurance Fund.  While the costs are not minimal, if current trends continue it appears that the effects of the failure may finally be moving into the rear view mirror of the industry.

Secondly, Congress passed a bill that will expand the size of mortgages that can be guaranteed with FHA insurance.  As I discussed in a previous post, there are serious financial hurdles confronting the FHA, but at least Congress realizes there is still a housing crisis in this Country and that occasionally something actually has to be done about it. 

But the news that intrigued me most yesterday was a nomination hearing for Thomas Hoening as Vice Chairman of the FDIC.  Why is this good news for credit unions, which of course are not subject to FDIC jurisdiction?  Because with Hoening’s nomination we may have someone in a high-profile position able and willing to criticize the financial industry and to advocate for reforms that are really needed to shield credit union members and the wider American public from banker malfeasance in the future. 

In my glass half-empty mode, it is clear to me that Congress has done nothing to address the fundamental causes of the financial crisis of 2008 and the ensuing Great Recession.  The American public has watched their tax-payer dollars go to bail out the largest banks in America, which continue to justify their exorbitant bonuses as a reflection of their alleged capitalist prowess.  The simple truth is that if we’ve learned anything, it is that if institutions are too big to fail, they’re too big.  This sentiment brings us to Mr. Hoening.  As a former President of the Federal Reserve Bank of Kansas, Mr. Hoening gave a speech in February, 2011 in which he argued that banks had in fact become too big to fail.  His solution was to pare back the activities in which investment banks may engage.  He sounded like a blogger when he concluded his speech by noting that the United States is still stuck with much of the same financial system which led to the initial crisis but with higher stakes.  His only hope was that fundamental changes could be brought to the system without first having to endure another such crisis.  I hope he’s right.

November 18, 2011 at 8:01 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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