CCTV-America on CU Taxi Medallion Lenders

CCTV-America examined the impact of Uber on the taxi medallion industry and its credit union lenders.

CCTV-America interviewed me for its story.

Here is a link to the story.

TDECU Commissioned Mural for TDECU Stadium Suite

TDECU commissioned artist Suzanne Sellers to create a mural for its suite at TDECU Stadium at the University of Houston.

The piece entitled: Victory, Character and Strength captures the driving spirit behind the University of Houston’s storied football program.

TDECU did not disclose the cost for the artwork.

Is commissioning artwork for a suite at a football stadium part of a credit union's tax exempt mission?

I also wonder if the members of the credit union think this is a good use of their money.

Read the press release.

NY Times: CU Start-Up Frustrated with Bureaucracy

The New York Times reported on the problem one credit union start-up had with the National Credit Union Administration (NCUA).

The credit union -- Internet Archive Federal Credit Union (New Brunswick, NJ) -- opened its door in 2012.

Credit union officials stated that they were frustrated by "a barrage of regulatory audits and limitations on its operations."

However, the article pointed out that this de novo credit union sought on several occasions to alter its business plans, including serving Bitcoin companies and providing international remittances for immigrant workers.

In my opinion, these changes in business plans at this start-up raised red flags with regulators and warranted increased oversight.

Read the story.

IG Report Recommends NCUA Add S to CAMEL Rating

The National Credit Union Administration (NCUA) Office of Inspector General (IG) recommended that NCUA add sensitivity to market risk (S) to its CAMEL rating.

Almost two decades earlier (January 1, 1997), the federal bank regulators -- The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency -- added S to their CAMELS rating.

The IG report noted that NCUA may not be effectively capturing interest rate risk (IRR) under "L" in its CAMEL rating.

The IG wrote:

[w]e determined that NCUA may not be effectively capturing IRR when assigning a composite CAMEL rating to a credit union. NCUA currently assesses sensitivity to market risk under the "L" in its CAMEL rating. However, combining sensitivity to market risk with liquidity may understate or obscure instances of high IRR exposure in a credit union. The addition of an “S” rating to its CAMEL Rating System to capture and separately assess a credit union’s sensitivity to market risk should improve NCUA’s ability to accurately measure and monitor interest rate risk. To better reflect the risk that changes in market rates will adversely affect a credit union’s capital and earnings, and in conjunction with a stated goal of NCUA’s IRR working group, we are making two recommendations in this report. We recommend NCUA management modify the current CAMEL Rating System by adding an “S” for market risk [S]ensitivity, and revising the “L” rating to reflect only liquidity factors.

Read the report.

NCUA Proposal Could Permit Seven State-wide FOMs

The National Credit Union Administration (NCUA) Board on November 19 issued a proposed rule for comment that would permit state-wide fields of membership (FOM) for seven states.

First, the NCUA Board is proposing that a Congressional District can constitute a well-defined local community. This represents a reversal of NCUA's previous position that a Congressional District did not meet the requirement of being a well-defined local community.

There are seven states represented by a single at large Congressional District. The seven states with a single at large Congressional District are: Alaska, Delaware, Montana, North Dakota, South Dakota, Vermont, and Wyoming. In addition, the District of Columbia and several U.S. territories would qualify as a well-defined local community.

However, I don't see how an at large state-wide Congressional District is local and demonstrates a commonality of interest or interaction among members. In fact, NCUA's FOM and Chartering Manual notes that a state does not meet the requirement of being local.

Second, the NCUA Board is proposing to expand the population size of a rural district. The Board is raising the population threshold from 250,000 to 1 million. The other requirement is that a rural district is sparsely populated -- no more than 100 people per square mile.

Currently, the states of Alaska, North Dakota, South Dakota, Vermont, and Wyoming have low population densities and are under the 1 million population threshold requirement. However, more than half of the residents in the states of Alaska, North Dakota, South Dakota, and Wyoming live in urban areas.

So, how can a whole state be treated as a rural district when more than half of the state's population lives in urban areas?

I will provide additional comments on other areas of this proposed rule over the next month.

Read the proposed rule.

New Lawsuit Highlights Dire Financial Condition of Melrose

Owners of New York City's taxi "medallions" and three credit unions that finance taxi medallions filed on November 17 a lawsuit in U.S. District Court against the City of New York and the Taxi and Limousine Commission.

The complaint alleges disparate regulatory treatment of the taxi medallion industry compared to Uber and other e-hail providers. This disparate treatment according to the complaint violates the equal protection clause under the Fourteenth Amendment of the U.S. Constitution.

Moreover, the complaint outlines the worsening financial condition of one credit union -- Melrose Credit Union (Briarwood, NY).

Starting in paragraph 28 of the complaint, Melrose Credit Union states that it had aggregate taxicab medallion loan delinquencies of approximately $32,000 and no troubled debt restructurings as of January 2014. As of August 31, 2015, Melrose’s medallion loan delinquencies totaled $226,552,719––an increase of approximately 10 percent in a one month period. Likewise, as of August 31, 2015, troubled debt restructurings totaled approximately $195,529,000. Thus, Melrose reached approximately $422,081,719 in delinquencies and troubled debt restructurings––an increase of approximately 7 percent in a single month, and a staggering 34 percent increase since May 31, 2015.

Also in paragraph 31, Melrose Credit Union stated that it has hundreds of medallion loans maturing between now and February 2016, which will worsen the problem. In fact, Melrose has 190 medallion loans maturing in December with almost $83,000,000 in balloon payments becoming due. However, many of these loans are probably underwater due to falling taxi medallion prices.

Furthermore in paragraph 54, Melrose alleges that the Taxi and Limousine Commission overstated the average value of taxi medallions that the credit union used to underwrite the purchase of medallions until October 2013. Elsewhere in the complaint, it states that the Taxi and Limousine Commission, when calculating the average value for taxi medallions, tossed out medallion purchases the Commission believed were below the fair value for medallions. This might suggest that Melrose may have advanced more funds than would have been prudent based upon overinflated valuation of taxi medallions.

In paragraph 187, the complaint states that Melrose financed approximately 128 of the roughly 200 accessible medallions sold at the November 2013 auction. Today, 108 of the approximately 128 (or 84 percent) of the medallions sold in the November 2013 auction and financed by Plaintiff Melrose are now classified as either delinquent or troubled debt. This would suggest recent vintage taxi medallion loans could account for the bulk of the delinquencies and trouble debt restructurings.

For example, Melrose's Call Reports state that the credit union made almost 2,000 member business loans worth almost $878 million in 2013 and approximately 1302 member business loans worth almost $600 million in 2014. Presumably, most of these loans were for taxi medallions.

This information would suggest delinquencies and troubled debt restructurings are only going to go higher.

The following link to an article about the lawsuit has a link to the complaint. Read the article.

Helping Other People Excel FCU Closed

The National Credit Union Administration liquidated Helping Other People Excel Federal Credit Union of Jackson, New Jersey.

NCUA placed Helping Other People Excel Federal Credit Union into conservatorship on Oct. 16. The agency made the decision to liquidate the credit union and discontinue operations after determining it was insolvent and had no prospect for restoring viable operations.

Helping Other People Excel Federal Credit Union served 110 members and had assets of $626,529, according to the credit union’s most recent Call Report.

Helping Other People Excel Federal Credit Union is the 8th federally insured credit union liquidation in 2015.

Read the press release.

CUs, Albeit Small Players in SBA Lending, Will See More SBA Lending in the Future

An article in The American Banker (subscription required) pointed out that although credit unions are originating a small percentage of Small Business Administration (SBA) 7(a) loans today, credit unions are expected to step up their 7(a) lending efforts in the future.

According to the article, "the volume of SBA loans originated by credit unions reached a record $369 million in the fiscal year that ended Sept. 30, credit unions' share of the overall 7(a) market remained stuck at 1.6%."

However, the article noted that 7(a) lending by credit unions was up 23% in fiscal year 2015 from the previous year and 38% from two years earlier.

Moreover, 7(a) lending by credit unions should grow going forward. Earlier this year, the SBA signed a memorandum of agreement with the National Credit Union Administration promising guidance and support for credit unions interested in the 7(a) program.

In addition, there is a strong incentive for credit unions to make SBA loans, as these loans do not count against the aggregate member business loan cap of 12.25 percent.

NCUA Board Approves Bank Merger into a Credit Unionr

The National Credit Union Administration (NCUA) Board yesterday in a closed door meeting approved a bank merger into a credit union.

According to a reliable source, the NCUA Board approved the merger of Calusa Bank (Punta Gorda, FL) into Achieva Credit Union (Dunedin, FL).

Customer Satisfaction with CUs Tumbles, As Membership Grows

The American Customer Satisfaction Index reported that consumer satisfaction with credit unions tumbled in 2015 compared to a year ago as the growth in new members strained credit union resources.

Customer satisfaction with credit unions declined by 4.7 percent to 81, and their edge over smaller banks (80) shrinks to a virtual tie.

Compared to 2014, credit unions scored lower in all customer experience categories except for the number of ATM locations.

Credit unions receive their best marks for staff courtesy (90) and transaction speed (89), although both are down from very high scores of 93 in 2014.

Credit union call centers are showing signs of strain as satisfaction fell from 90 in 2014 to 85 in 2015.

Satisfaction with credit union websites slipped from 89 to 86.

Credit union members assigned a lower scores to the variety of financial services available (down from 87 to 84), ease of adding or making changes to accounts (down from 87 to 83), and ease of understanding information about accounts (down from 86 to 82).

Members continue to believe that their credit union offers competitive interest rates (80), although not quite as competitive as in 2014 (84).

The report found that despite a general deterioration in service over the past year, credit unions go nearly head-to-head with smaller regional and community banks for most customer experience elements. While the two are deadlocked for website satisfaction, credit unions receive a higher mark for call centers. The report found that regional and community banks edge past credit unions in four areas: service variety, account changes, account information, and ATM locations.

Compared with national banks and super regional banks, credit unions earn superior satisfaction scores in all but two areas -- the number and location of branches and ATMs.

The report noted that the influx of new members had put pressure on credit unions with regard to customer service and credit unions are struggling to maintain their historically high satisfaction levels.


Read the press release.

NCUA and ECOA

The National Credit Union Administration (NCUA) has recently chartered credit unions to serve people that belong to certain religious groups and native American tribes.

For example, on August 28, 2015, NCUA's Office of Consumer Protection chartered a federal credit union to serve members and employees of the Redeemed Christian Church of God North America, Inc. NCUA also chartered a federal credit union on July 7 of this year to serve employees, members, synods and member congregations of the Evangelical Lutheran Church in America.

While these two credit unions have a common bond, it is unclear to me how these institutions' common bonds are in compliance with the Equal Credit Opportunity Act (ECOA).

ECOA makes it unlawful for any creditor to discriminate against any applicant with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status, or age.

Does NCUA give these credit unions a waiver with respect to complying with ECOA? Or does the agency not even consider ECOA when considering a charter application from a group for a credit union?

It is my opinion that NCUA should not charter a credit union that would appear to be out of compliance with ECOA.

NCUSIF Losses for 7 CU Failures Between April 1 and September 30

The National Credit Union Administration's Office of the Inspector General in its Semiannual Report to the Congress published the estimated losses to National Credit Union Share Insurance Fund (NCUSIF) from the failure of seven credit unions during the second and third quarter of 2015.

These seven credit union failures were not subject to Material Loss Reviews.

Below is the names of the credit unions and the estimated NCUSIF losses.

• TLC Federal Credit Union, $1,210,000;
• 65 Family Federal Credit Union, $135,713;
• Kolmar NY Employees Federal Credit Union, $310,137;
• Trailblazer Federal Credit Union, $1,072,233;
• Lakeside Federal Credit Union, $1,665,434;
• SCICAP Credit Union, $2,057,766; and
• Quemado Federal Credit Union, $245,840.

Screening Methods for Checking Account Applicants

If your credit union uses consumer-screening methods for opening a checking account, you may want to pay attention to a letter sent by New York Attorney General Eric T. Schneiderman last month to nearly 100 banks operating in New York.

The letter called on the banks revise their consumer-screening protocols to ensure that more consumers receive access to standard checking accounts.

According to the letter, the use of consumer-screening agencies like ChexSystems, Inc. and Early Warning Services, LLC has caused some banks to unnecessarily reject thousands of applicants for minor financial missteps, thereby denying them access to mainstream financial services.

This letter echoes the language from an October report by the National Consumer Law Center, a liberal consumer advocacy group.

While the letter is only for banks operating in New York, it is only a matter of time before credit unions are subject to the same oversight. In fact, the Consumer Financial Protection Bureau has signaled its intention to examine this issue more closely.

Rea the press release.

NCUA's Regulations Stymie Credit Union Mergers Into Banks

Over the last couple of years, I have reported on credit unions acquiring banks. While such mergers remain rare, these mergers are more frequent now than just several years ago.

However, these mergers appear to be a one way street -- banks merging into credit unions, not credit unions merging into banks.

What is keeping these mergers from being a two way street is the National Credit Union Administration's rules governing the merger of a credit union into a bank (Section 708a SubPart C).

The National Credit Union Administration (NCUA) requires the credit union board to either "conduct a well-publicized merger auction and obtain purchase quotations from at least three banks, two or more of which must be stock banks; or retain a qualified appraisal entity to analyze and estimate the merger value of the credit union."

If the board decides against an auction, the board needs to publish a notice on why the board is considering the merger and the major positive and negative effects of the proposed merger. The notice should also include information on where members can send comments on the proposed merger.

Furthermore, if a credit union's board votes to move forward with the merger, the majority of board members must vote in the affirmative that the merger is in the best interests of members and the selected merger partner is the best choice for members.

I don't know why this provision is necessary. It assumes that the board is not fulfilling its fiduciary duties.

Moreover, before members vote on the merger, the credit union must send to members prescribed language about the merger under the guise of protecting members interests. Unfortunately, the disclosure has language meant to dissuade members from voting for the merger.

For example, if the merger is with a stock bank, the disclosures must have a clear and conspicuous disclosure that if the merger is approved the members will lose all of their ownership interests in the institution, including the right to vote, the right to share in the value of the institution should it be liquidated, the right to share in any extraordinary dividends, and the right to have the net worth of the institution managed in their best interests.

Telling members that they will lose their ownership interest is meant to scare members into voting against the proposed merger.

Additionally, it seems to me that this disclosure is a red herring. If such a merger moves forward, members will be compensated for their ownership interest.

In addition, the disclosure is required to state that the merger may affect the ability of members to obtain non-housing-related consumer loans. Once again, this language is meant to scare members into thinking that they may not be able to get car loans or personal loans. I find this disclosure ironic, given NCUA's support for policies that would move credit unions away from non-housing-related consumer loans.

A cynical person would view this regulation as erecting a barrier to such mergers.

In my opinion, NCUA needs to modify its regulation governing credit union mergers into banks. The rule should not be any more onerous than the requirements governing credit union mergers.

Ultimately, these mergers are business decisions.

Transcript: NCUA Prepping to Increase the Size of Community Charters

The transcript from the September 2015 National Credit Union Administration (NCUA) Board meeting indicates that NCUA is preparing to allow federal credit unions to add larger geographic areas to their fields of membership (FOM).

The transcript makes it clear that NCUA is preparing to gut the requirement that a community be local, as well as well-defined.

As background, Congress in 1998 added the requirement that a well-defined community be local. The term local was meant to limit the size of a community charter.

However, Metsger believes that county or state boundaries are becoming increasingly irrelevant in defining communities.

In addition, a core-based statistical area may be a too limiting definition of a well-defined local community. A core-based statistical area is defined as a geographic area with an urban center of at least 10,000 people and adjacent areas that are socioeconomically tied to the urban center by commuting. A core-based statistical area can either be a metropolitan statistical area or micropolitan statistical area.

Below is the Q & A between Vice Chairman Metsger and NCUA employee Matt Biliouris from the September NCUA Board meeting.

Vice Chairman Metsger: Over time, as commuting patterns change and as consumers’ ability to obtain financial services online and through their mobile devices grows, their need to actually go to brick and mortar branches diminishes. Credit unions are able to serve larger geographic areas. In essence, their community naturally expands, just as many city borders grow through annexation of contiguous territory. Is that correct?

Matt Biliouris: Yes.

Vice Chairman Metsger: The conclusion I draw is that it's natural for people's sense of community to grow and that there is ample precedent that over time, community credit unions feel that memberships are likely to grow into counties that are adjacent to their existing field of membership and possibly even further than contiguous counties. Do you think that's a logical conclusion?

Matt Biliouris: I think you can make a compelling argument that there is interaction with residents outside of a core-based statistical area that would suffice looking at that and could credit unions make an argument that that is a viable well-defined local community in and of itself.

Vice Chairman Metsger: I also see a trend that county and state lines that were frequently drawn centuries ago are increasingly less relevant as delineators of communities. While 100 years ago, people rarely ventured from one county to another, today they regularly travel not only from one county to county, but also from state to state. I imagine if we did a show of hands in the audience, there are a lot of people that aren't living in this county that are here today. Am I correct that, as we get FOM expansion requests, we increasingly see FOMs that expand into adjacent counties and states such as this one?

Matt Biliouris: Subject to our requirements.

Vice Chairman Metsger: Yes.

Matt Biliouris: Right.

Vice Chairman Metsger: As we consider broader FOM changes, it is reasonable that we should incorporate this expanding definition of community. I know that your internal FOM working group has been reviewing a number of updates to FOM rules and policies, and I appreciate the update here at this Board meeting. I look forward to reviewing the recommendations and hope that one of them will be to recognize the change that has occurred in our country over the last several decades and allow community charters to serve their current communities and not just the ones that were created decades or centuries ago.

As the Chairman said and as Board Member McWatters said, these are really important, not only to credit unions, but what's really important, in my view, is not just what's important to credit unions; What's important is to the members of credit unions and the citizens who then form that credit union for their financial services. Again, I commend you for the work all of you have done, and as Board Member McWatters said, the sooner we get these recommendations, the better that will be for us. I know you're going full speed ahead.

Ent Members Vote to Become a State Charter

Members of Ent Federal Credit Union (Colorado Springs, CO) have voted to switch to a state charter.

According to the announcement, 76.9 percent of the 35,729 voting members voted in favor of the proposal.

The switch to a Colorado state charter will take effect on January 1, 2016.

Read the announcement.

Bayport CU Purchases 98,506-Square-Foot Office Building

BayPort Credit Union has purchased a 98,506-square-foot, Class A office building in Newport News, Virginia.

The credit union will relocate its corporate office to the building located at the corner of Oyster Point Road and Canon Boulevard.

The credit union plans to occupy about 20 percent of the building.

The purchase price was not disclosed.

Read the story.

Five Star CU Completes Purchase of Bank

Five Star Credit Union (Dothan, AL) has completed the purchase and assumption of Farmers State Bank, which is headquarters in Lumpkin, GA.

The $345-million million Five Star is the first credit union to buy two banks. Last year Five Star completed the purchase of the $23-million Flint River National Bank in Camilla, Ga.

The $47-million Farmers State Bank has 3 bank office locations.

According to Five Star Credit Union, approximately 2,900 bank customers will become members of the credit union.

Read the story.

Defections from Federal Charter to Cause NCUA to Push FOM Boundaries

Recent defections by large credit unions from a federal charter to a state charter, as well as announced charter changes, will cause the National Credit Union Administration (NCUA) Board to push the envelop with regard to changes to its field of membership (FOM).

A column by NCUA Board member Metsger in the March 2015 NCUA Report noted that over the past four years federal-to-state conversions are running nearly 3-to-1 and the pace is accelerating.

Recent defections from the federal charter include $6.5 billion Suncoast CU (Tampa, FL), $1.4 billion American Eagle Financial CU (East Hartford, CT), $1 billion Rogue CU (Medford, OR), $947 million Oregon State CU (Corvallis, OR).

In addition, there are other defections in the pipeline. For example, $4.2 billion Ent FCU (Colorado Springs, CO) is in the process of voting to switch to a state charter. United FCU with $1.9 billion in assets (Saint Joseph, MI) is merging with Lake Michigan CU (Grand Rapids, MI) and will opt for a state charter.

In response to these defections by large federal credit unions, NCUA has formed a Field of Membership Working Group to develop recommendations to enhance the federal charter and make it more competitive with state charters.

Any recommendations coming from this working group later this year should dramatically expand the fields of membership for federal credit unions.

After all, NCUA Board member McWatters in the October 2015 NCUA Report wrote that he wants any fields of membership proposal coming before the NCUA Board to be bold.

Defections from Federal Charter to Create Budgetary Headaches for NCUA

Defections from the federal charter are going to have budgetary implications for the National Credit Union Administration (NCUA).

Earlier this year, NCUA Board member Metsger wrote that number federal-to-state charter conversions are running at the pace of three-to-one over the last four years. Asset migration from federal to state charters is running at a faster rate of eight-to-one.

As NCUA loses federal charters and assets in federal credit unions, the agency will see a decline in operating fee revenues (assuming no change in the operating fee rate). For example, the conversion of Suncoast Credit Union (Tampa, FL) to a state charter meant that in 2015 NCUA saw a decline in operating fee revenues by approximately $400,000. The proposed conversion of Ent (Colorado Springs, CO) will cost NCUA almost $363,000 in revenues.

To address the decline in operating fee revenues, NCUA could raise the operating fee rate. But an increase in the operating fee rate could create a vicious cycle with even more conversions to state charters or even bank charters.

Another way to address budget pressures is to increase the overhead transfer rate (OTR) from the National Credit Union Share Insurance Fund. However, such a move will generate cries of outrage from state charters and lead to demands for greater say regarding NCUA's budget.

Another possibility for addressing its budgetary pressures arising from the loss of federal charters is for NCUA to control its expenses. But Credit Union Times is reporting that NCUA Chairman Debbie Matz on October 30 stated she expects the overall operating budget for the agency to increase in 2016.

CUs Provided Public Funds and Tax Incentives from Local Governments for Facilities

In October, several local governments provided tax incentives or grants to credit unions for the renovation or construction of facilities.

Dupaco Credit Union will receive tax incentives for a project in the Crossroads Center area of Waterloo, Iowa. The Waterloo City Council voted to approve three years of 50 percent tax rebates, despite the city's policy provides one year of 50 percent tax rebates for every $1 million in new tax base generated. Dupaco's project will generate just $1.2 million in tax base, the additional two years of rebates were added due to the credit union's additional costs for redeveloping the site.

The Pendleton Development Commission (OR) approved a $73,049 grant to Old West Credit Union to improve the second floor of the former Bank of America building. The grant will pay 25 percent of the second story renovation and elevator cost.

The Lucas County (OH) Commission approved an economic development allocation of $100,000 to the Toledo Urban Foundation for the construction cost of a new facility for Toledo Urban Federal Credit Union.