Monday, December 29, 2014

Massachusetts CU Regulator Adds Sensitivity to Market Risk to Exam Ratings

The Massachusetts Division of Banks announced on December 18 that it added “Sensitivity to Market Risk” as a standalone component of its Risk Management examinations.

As a result, the rating system’s acronym will change from CAMEL to CAMELS.

Sensitivity to Market Risk is generally described as the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect earnings and/or net worth. For most institutions the analysis will focus on interest rate risk.

This change will go into effect for all examinations commencing after April 1, 2015.

Massachusetts Division of Banks noted that at least five state credit union regulators have already adopted the FFIEC’s CAMELS rating system for credit union examinations.

However, the National Credit Union Administration (NCUA) has not adopted Sensitivity to Market Risk as a standalone component for its safety and soundness exams.

As I stated on August 25, NCUA needs to show some leadership by adding a standalone Sensitivity to Market Risk component to its safety and soundness examinations.

Read the letter.

Wednesday, December 24, 2014

NCUA Charters Lutheran FCU

The National Credit Union Administration’s Office of Consumer Protection granted a charter to Lutheran Federal Credit Union to serve employees, active members and volunteers of the Lutheran Church – Missouri Synod and its affiliated districts, member congregations, seminaries and other closely aligned entities.

The credit union’s headquarters will be located in St. Louis, and the credit union expects to open in the second quarter of 2015.

Lutheran Federal Credit Union is the third new federally chartered credit union of 2014 and the first new federal charter in Missouri since 2005.

Read the press release.

Tuesday, December 23, 2014

Tiny Faith-Based Low-Income CU Under Cease and Desist Order

The National Credit Union Administration has issued a cease and desist order to New Bethel Federal Credit Union of Portsmouth, Virginia.

According to the enforcement order, the credit union is required to:
  • Produce source documents demonstrating a certificate of deposit with a local bank is properly titled in the credit union’s name.
  • Provide the agency with complete and accurate financial statements and up-to-date member share and loan transactions.
  • Obtain a member account verification and independent audit through 2014.
  • Charge off all non-performing loans by December 31, 2014 and fully fund its allowance for loan and lease loss accounts.
  • Cease granting any new loans until NCUA deems the credit union to be operating in a manner conducive to making sound lending decisions.
  • Comply with the Bank Secrecy Act and the USA Patriot Act .
  • Ensure internal control reviews by the credit union’s Supervisory Committee.
New Bethel Federal Credit Union has assets of $85,845 and serves 176 members.

Read the order.

San Diego County Credit Union Poinsettia Bowl

Tonight is the San Diego County Credit Union Poinsettia Bowl. I do not plan to watch.

This is the 10th consecutive year that this $6.6 billion credit union is the title sponsor of the bowl game. San Diego County Credit Union has been the only title sponsor of the bowl game since its inception.

In fact, San Diego County Credit Union is the only credit union in the country to be the title sponsor of a college bowl game.

However, over this 10-year period, San Diego County Credit Union has never disclosed how much it has spent for the naming rights to this bowl game.

As a tax exempt organization, the American taxpayers have the right to know.

Monday, December 22, 2014

Undercapitalized Credit Unions, Q3 2014

There were 47 federally-insured credit unions that were undercapitalized as of Sepember 30, 2014.

Seven credit unions were critically undercapitalized, while 9 credit unions were significantly undercapitalized.

One of the critically undercapitalized credit unions was closed -- County & Municipal Employees in Edinburg, TX. Another critically undercapitalized credit union -- Health One -- is under NCUA conservatorship.

Three credit unions were classified as undercapitalized, although their leverage ratio exceeded 7 percent.

Below is a list of undercapitalized credit unions. Click on the image to enlarge.

Friday, December 19, 2014

Pentagon Proposal Would Constrict Credit

The Defense Department’s proposed restrictions on credit for service members goes too far, trade groups representing banks and credit unions said yesterday in a comment letter. Not only would the proposed rule constrict mainstream credit options for members of the military and their families, it would create technological and compliance hurdles that would impede lending across the country, regardless of the borrower’s military status.

In the comment letter, the trade groups noted that the Department of Defense (DoD) offered no evidence for covering mainstream products such as credit cards, student loans and installment loans under the Military Lending Act, which was intended to target tax refund anticipation loans, payday loans, car title loans and other predatory products not generally offered by depository institutions.

The groups urged DoD to exempt depository institutions from the rule, warning that its idiosyncratic Military APR cap (encompassing even low-rate credit cards) and “vague and uncertain prohibitions” could force banks and credit unions out of the military market -- thus reducing access to mainstream credit for service members.

The proposal would also impose massive compliance burdens on all banks, whether they serve military customers or not. While today service members and their families must proactively identify themselves as such, DoD would require lenders to screen all applicants for military status. This requires checking each applicant at least twice in a Pentagon-run database -- but the database is frequently unavailable, which would mean “virtually all new consumer lending comes to a standstill.”

Read the letter.

Thursday, December 18, 2014

Low-Income Credit Unions and Secondary Capital

The Federal Credit Union Act allows low-income credit unions to count secondary or supplemental capital as part of their net worth.

Seventy-five credit unions, excluding Texans CU (Richardson, TX) and A.E.A FCU (Yuma, AZ), reported holding uninsured secondary capital accounts as part of their net worth as of the third quarter of 2014.

Twelve credit union as of September reported that over fifty percent of their net worth is in the form of uninsured secondary capital accounts. This includes Self-Help FCU (Durham, NC), which reports 78.18 percent of its net worth is in the form of uninsured secondary capital accounts.

However, should there be a limit on the amount of secondary capital that low-income credit unions can count towards net worth?

As I have previously written, regulators are focused on increasing the amount of high quality capital that financial institutions hold.

Retained earnings are high quality capital, while secondary or supplemental capital is not high quality capital; because it lacks permanence.

With the number of low-income designated credit unions almost doubling since the middle of 2012 and with few low-income credit unions currently exercising this authority, this would be an ideal time for the National Credit Union Administration to revisit its net worth requirements for low-income credit unions.

The goal should be to have a majority of low income credit unions' net worth comprised of permanent, high quality capital.

Tuesday, December 16, 2014

LUA with Sperry Associates FCU Terminated

The National Credit Union Administration announced today that it has terminated its Published Letter of Understanding and Agreement (LUA), dated May 28, 2010, with Sperry Associates Federal Credit Union of Garden City Park, New York.

Everyone Can Bank Here

NRL Federal Credit Union of Alexandria, Virginia is advertising that “EVERYONE CAN BANK HERE.”

ABA wrote National Credit Union Administration Chairman Debbie Matz on December 15 urging NCUA to order NRL FCU to stop such advertising, reminding the agency of its September 2013 guidance to federal credit unions to avoid “overly aggressive marketing campaigns ... providing consumers with misleading information about single and multiple common bond membership requirements.”​

Read the letter.

Monday, December 15, 2014

54 Percent of CUs Reported Y-O-Y Decline in Membership

The National Credit Union Administration last week reported that 54 percent of all federally insured credit union had fewer members as of the third quarter of 2014 compared to a year ago.

The median year-over-year decline in membership was minus 0.4 percent.

The agency acknowledges that credit unions with falling membership tend to be small. Seventy-five percent had less than $50 million in assets.

In 29 states, the median year-over-year membership growth rate was negative. That means more than half of the credit unions in those 29 states had fewer members as of September 2014 compared to September 2013. The states of New Jersey, Pennsylvania, and Montana had the lowest membership growth rate at minus 1.5 percent each.

NCUA notes that most of the industry's membership growth is coming from credit unions with $500 million or more in assets.

Saturday, December 13, 2014

Health One CU Liquidated

The Michigan Department of Insurance and Financial Services liquidated Health One Credit Union of Detroit and named the National Credit Union Administration as liquidating agent.

New England Federal Credit Union of Williston, Vermont, immediately assumed Health One Credit Union’s members, assets, shares and selected loans.

The Department of Insurance and Financial Services placed Health One Credit Union into conservatorship on May 16, 2014, and appointed NCUA as receiver. The Department made the decision to liquidate Health One Credit Union and discontinue its operations after determining the credit union was insolvent with no prospect for restoring viable operations.

Health One Credit Union was critically undercapitalized with a net worth ratio of 1.39 percent as of the end of the third quarter. The credit union was reporting that 10.47 percent of its loans were 60 days or more past due, according to its most recent call report. In addition, the credit union posted a loss of $651,309 through the first three quarters of 2014 after posting a loss of over $1.3 million for all of 2013.

Health One Credit Union is the eleventh federally insured credit union liquidation in 2014 and the second Michigan credit union to fail this year. Metropolitan Church of God Credit Union was closed on December 3, 2014.

Read the press release.

Friday, December 12, 2014

Poor Customer Service Experience

On September 2, 2014, I wrote the NCUA's General Counsel requesting a legal opinion letter.

A month passed and I had not received an acknowledgment from the agency that they had received the letter.

I sent an inquiry to find out if the General Counsel Office had received the letter.

I receive a short response that he had received the letter.

Since then, I have not heard anything.

At ABA, we place an emphasis on offering excellent customer service.

At the minimum, good customer service would include acknowledging the request when sent, setting expectations as to when the request would be fulfilled, and keeping the requester informed regarding the status of the request.

In this case, NCUA's General Counsel Office has done none of these things.

Maybe my experience is unique.

But there is no excuse for this poor customer service.

Thursday, December 11, 2014

Two Large CUs Announce Expansion Plans

In the last week, two large credit unions have announced major expansion plans.

According to the San Antonio Express News, Security Service Federal Credit Union (San Antonio, TX) announced plans to build a $120 million headquarters campus near its current main office. The credit union will build 250,000 square feet of space on 66 acres beginning in early 2015. On an initial 27-acre site, the credit union will construct an operations building, an amenities facility with food service, a gym and a 500-seat meeting center, and a parking structure.

Florida Today is reporting that Space Coast Credit Union (Melbourne, FL) is proposing a $30 million expansion of its Baytree corporate office complex. The credit union wants to build three new three-story office buildings totaling 144,344 square feet, as well as a four-story, 500-vehicle employee parking garage. Space Coast Credit Union currently has an 80,268-square-foot office building and a 5,189-square-foot bank branch at the Baytree site.

Tuesday, December 9, 2014

Senator Coburn Calls for Ending Wasteful Tax Breaks, Including Credit Union Tax Exemption

Senator Coburn (R - OK) released a report today identifying over $900 billion in wasteful tax breaks to Washington special interests.

Among the wasteful tax breaks spotlighted in the report is the credit union industry's exemption from the federal corporate income tax.

Senator Coburn notes that "the numerous preferences in the personal and corporate tax code come at a price" ... of keeping "the standard tax rates artificially high."

According to Senator Coburn, the credit union tax exemption "will cost taxpayers $2.1 billion in FY 2014 and $11.9 billion from FY 2014 through FY 2018."

The report notes that the credit union tax exemption "distorts competition within similar institutions and has no economic justification to exist."

The report states that the tax exemption has enabled credit unions to grow at more rapidly than other depository institutions with credit union industry assets nearly doubling between 2003 and 2012.

Also, the report points out that the common bond requirement, which at one time allowed credit unions to point to their uniqueness, has been all but eviscerated and that anecdotal evidence indicates that credit unions are not fulfilling their purpose of serving people of modest means.

Go to page 116 of the report to read why Senator Coburn recommends eliminating the credit union tax exemption as a part of comprehensive tax reform.

Monday, December 8, 2014

Credit Unions and Moneyball for Government

Jim Nussle, the CEO and president of the Credit Union National Association (CUNA), last summer teamed up with Peter Orszag to write Moneyball for Government.

According to the Moneyball Principles, government at all levels should help improve outcomes for young people, their families and communities by:
  • Building evidence about the practices, policies and programs that will achieve the most effective and efficient results so that policymakers can make better decisions;
  • Investing limited taxpayer dollars in practices, policies and programs that use data, evidence and evaluation to demonstrate they work; and
  • Directing funds away from practices, policies, and programs that consistently fail to achieve measurable outcomes.
I suspect Mr. Nussle would also agree the same should apply to tax expenditures, which includes the credit union tax exemption.

However, NCUA does not practice the Moneyball Principles. The agency does not gather data and evidence to evaluate if credit unions are fulfilling their public policy mission of serving people of modest means.

If Mr. Nussle believes in the Moneyball Principles, he will use his new position as the head of CUNA to focus the agency on gather evidence and data about credit union services to people of modest means.

This information should go beyond the number of members served or the number of credit unions that have a low-income designation.

This will allow policymakers to make better decisions about the credit union tax expenditure and whether it is achieving the desired measurable outcomes.

Thursday, December 4, 2014

Credit Union Lending Grew by 10.1 Percent over the Last Year

The National Credit Union Administration reported today that lending at federally insured credit unions grew by 10.1 percent over the last year.

Total outstanding loans were $695.3 billion at the end of the third quarter. NCUA reported that all major loan categories grew in the third quarter.

  • New auto loans grew 19.4 percent to $82.4 billion.
  • Used auto loans increased 12.2 percent to $140.3 billion.
  • Net member business loan balances rose 12.6 percent to $50.4 billion.
  • Non-federally guaranteed student loans expanded 21.9 percent to $3.1 billion.
  • First mortgage real estate loans reached $286.4 billion, up 9.1 percent from a year earlier.
  • Second-mortgage loans rose 1.1 percent for the year ending September 30 to $71.5 billion.
However, strong loan growth (3.2 percent for the third quarter) coupled with a decline in deposits and shares in the third quarter caused the loan-to-share ratio to increase by 238 basis points to 74 percent, the highest ratio since the fourth quarter of 2009.

The growth in loans in the third quarter was funded by a contraction in cash and short-term investments, which as a percent of assets fell 142 basis points during the quarter to 13.07 percent.

Deposits and shares fell by slightly more than $1.2 billion during the quarter to $939.1 billion as of September 30, 2014. However, deposits and shares were up $33.8 billion over the last year.

The net long-term asset ratio of credit unions improved falling 80 basis points over the last year to 35.03 percent. However, the agency warned that high levels of long-term investments in the asset portfolio could pose interest-rate risk for credit unions as interest rates rise.

Net income through the first nine months of 2014 was $6.8 billion, up 8.6 percent from a year earlier. The return on average assets ratio rose to an annualized 83 basis points through the end of the third quarter, a slight increase from the previous quarter and 3 basis points above the third quarter of 2013.

Better net interest margins and lower operating expenses (as a percent of average assets) positively contributed to the higher return on average assets, while lower fee and other income (as a percent of average assets) negatively impacted the return on average assets.

The aggregate net worth ratio for federally insured credit unions was 10.93 percent at the end of the third quarter, 17 basis points higher than the previous quarter and 28 basis points higher than the end of the third quarter of 2013. NCUA reported that 97.5 percent of federally insured credit unions had a net worth ratio at or above the statutorily required 7 percent level. Only 43 credit unions were undercapitalized at the end of the third quarter with 7 credit unions critically undercapitalized and 9 credit unions significantly undercapitalized.

Delinquency and net charge-off ratios for federally insured credit unions were essentially flat between the end of the second quarter and the end of the third. The delinquency ratio remained at 0.85 percent, while the net charge-off ratio fell by 1 basis point to 48 basis points.

Read the press release.

Wednesday, December 3, 2014

Small Michigan CU Liquidated

The Michigan Department of Insurance and Financial Services liquidated the Metropolitan Church of God Credit Union of Detroit and appointed the National Credit Union Administration as liquidating agent.

The Michigan Department of Insurance and Financial Services made the decision to liquidate the Metropolitan Church of God Credit Union and discontinue its operations after determining the credit union was insolvent and had no prospect for restoring viable operations.

The credit union served 191 members and had assets of $141,494, according to the credit union’s most recent Call Report.

Metropolitan Church of God is the tenth federally insured credit union liquidation in 2014.

Read the press release.

Tuesday, December 2, 2014

Bank Application to Merge with Florida Credit Union Withdrawn

The Office of the Comptroller of the Currency is reporting that the application of First National Bank of Crestview (crestview, FL) to merge with First Commerce Credit Union (Tallahassee, FL) was withdrawn on November 6.

No reason was provided for the application being withdrawn.

See document.

Monday, December 1, 2014

Oral Arguments Today in Mortgage Loan Officer Minimum Wage and Overtime Pay Case

The Supreme Court of the United States will hear oral arguments today in a case that will impact banks and credit unions.

The U.S. Department of Labor in 2010 concluded that mortgage loan officers are subject to minimum wage and overtime pay regulations. This decision reversed a 2004 finding made during the administration of President George W. Bush that concluded mortgage loan officers were exempt from the regulations.

The Supreme Court will decide whether the Department of Labor in 2010 had violated Administrative Procedures Act by not engaging in a formal rulemaking process. The government is contending that it did not have to conduct a formal rulemaking because it was only offering a new interpretation of an existing regulation.

A district court judge ruled in favor of the government but, in a July 2013 ruling, the U.S. Court of Appeals for the District of Columbia Circuit threw out the new interpretation, saying a formal rulemaking process was required.

The two related cases being heard by the Supreme Court are Perez v. Mortgage Bankers Association and Nickols v. Mortgage Bankers Association.


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