Friday, August 30, 2013

Federally Insured Credit Unions Report Brisk Loan Growth, Earn $2.2 Billion

National Credit Union Administration reported that federally insured credit unions saw brisk loan growth and their highest net worth ratio since 2008 in the second quarter.

Loans were up 2.3 percent or $13.8 billion in the second quarter to $613.7 billion with lending growing in nearly every category.
•First mortgage real estate loans rose to $253.8 billion, up 2.1 percent for the quarter and 5.6 percent year-over-year.
•New auto loans expanded to $66.4 billion, up 2.8 percent for the quarter and 10.7 percent for the last four quarters.
•Used auto loans rose to $121.3 billion, up 3.7 percent for the quarter and 9.3 percent for the year ending June 30.
•Net member business loan balances grew to $43.5 billion, up 2.3 percent for the quarter and 8.3 percent for the prior 12 months.

Indirect lending posted strong growth, increasing by $3.7 billion during the quarter to almost $84.4 billion.

Total shares and deposits were almost flat for the quarter, falling by almost $500 million. As a result, the loan to share ratio rose from 65.92 percent to 67.48 percent.

The industry’s net worth ratio stood at 10.5 percent of assets at the end of the second quarter, up 34 basis points from the end of the second quarter of 2012. The ratio is at its highest level since the fourth quarter of 2008. The industry remains well-capitalized, with 96.2 percent of all federally insured credit unions reporting a net worth above 7.0 percent. In the prior quarter, 95.8 percent were well-capitalized. Only 76 credit unions were undercapitalized as of June 2013 with 7 credit unions critically undercapitalized.

Credit union reported that combined delinquencies and net charge-offs rose by $1.1 billion in the second quarter to $8.1 billion. The delinquency ratio of federally insured credit unions for the second quarter of 2013 was 1.04 percent -- up 2 basis points during the quarter. The industry’s net charge-off ratio declined to an annualized 58 basis points at the end of the second quarter. Since the second quarter of 2012, federally insured credit unions’ net charge-off ratio has declined by 17 basis points.

Driven largely by increases in fee income and declines in loan-loss provisions, federally insured credit unions in the second quarter had a net income of more than $2.2 billion. The industry’s return on average assets ratio stood at an annualized 85 basis points at the end of the second quarter, inching closer to pre-crisis norms. Year-to-date, net income was almost $4.4 billion compared to slightly more than $4.2 billion for the same time period last year.

The rise in medium-term and long-term interest rates during the second quarter caused the accumulated unrealized gains/losses in available for sale securities to move from a gain of $2 billion at the end of the first quarter to a loss of $614 million at the end of the second quarter.

The following link summarizes the second quarter performance of federally insured credit unions.

Read the press release.

Thursday, August 29, 2013

Interchange Brief Filed by Bank and CU Groups

Bank and credit union trade groups yesterday filed a “friend of the court” brief urging Judge Richard Leon not to order the Federal Reserve to issue an interim rule on interchange.

The groups argued that Leon has no legal authority to order the Federal Reserve Board to conduct rulemaking. Even if he did, they said, “a rush to issue a new rule will harm all affected interests, including consumers, and threaten the effective functioning, stability, and security of the electronic debit card payments system.”

Finally, they said, an interim rule would invite further legal challenges from the Fed or issuers who could contest “the confiscatory nature of an interim interchange fee rule.”

Leon ruled last month that the Fed’s rule violated congressional intent in the Dodd-Frank Act by setting the interchange fee cap too high and failing to allow merchants to choose multiple unaffiliated PIN and signature networks for each card transaction they process.

Read the brief.

Wednesday, August 28, 2013

Illinois CUs Fail to Make Civil Penalty Orders Confidential

The Illinois Credit Union League tried; but failed to get legislation passed that would have made civil penalty orders confidential.

HB 1572, when it was introduced, would have made civil penalty orders confidential supervisory information. The Department would have been prohibited from disclosing the civil penalty order to any person, except that once such an order is a final administrative decision of the Department and has been adjudicated to finality, a concise syllabus of the order may be posted on the Department's official website.

However, this provision of the bill was deleted before the bill became law.

But the bill raised the regulatory threshold for the assessing a civil money penalty.

There is now a two part test.

First, the Secretary of Financial and Professional Regulation has to reasonably determine that the credit union has committed a violation of the Act, any rule adopted in accordance with the Act, or any order of the Secretary issued pursuant to his or her authority under the Act or has engaged or participated in any unsafe or unsound practice.

Second, before the Secretary of Financial and Professional Regulation can assess a civil money penalty, the Department must further determine that the credit union’s action has directly resulted in a substantial and material financial loss or created a reasonable probability that a substantial and material financial loss will directly result, or that violation or unsafe or unsound practice constituted willful misconduct and a material breach of fiduciary duty of any director, officer, or committee member of the credit union.

The bill goes on to state that "absent compelling and extraordinary circumstances, no civil penalty shall be assessed, unless the financial loss or probable financial loss is equal to or greater than either 1 percent of the credit union's total assets for the immediately preceding 12-month period, or 1 percent of the credit union's total gross income for the immediately preceding 12-month period, whichever is less."

Tuesday, August 27, 2013

Virtual Currency and Credit Unions

In the past week, I've seen two stories about Bitcoin and credit unions.

Credit Union Times reported that the Department of Homeland Security seized a $2.9 million Dwolla account held by Mt.Gox subsidiary Mutum Sigillum at Veridian Credit Union of Waterloo, Iowa. At roughly the same time that the account was seized, a court order stated "there was probable cause to believe Bitcoin virtual currency exchange and Dwolla client Mt.Gox was operating as an unlicensed money transmitting business."

A second story by Bloomberg stated that Tradehill Inc., an exchange for virtual currencies such as Bitcoin, is moving customer accounts to Internet Archive Federal Credit Union of New Brunswick, New Jersey. Internet Archive FCU was chartered in 2012 by NCUA as a low-income community credit union.

Bitcoin has attracted the attention of the banking regulators. The Wall Street Journal reported that "representatives from at least seven government agencies are scheduled to meet Monday with the main Bitcoin trade group." In addition, the New York Department of Financial Services has issued subpoenas to approximately two dozen Bitcoin companies seeking information on their business practices.

Monday, August 26, 2013

Little Guy?

Credit unions claim they are looking out for the little guy.

But is Texans linebacker Brian Cushing a little guy or person of small means?

Cushing, who is a member of First Community Credit Union, reportedly will earn $15.9 million between 2009 and the end of the 2013 season. This does not include his sponsorship deal with the same credit union.

Brian Cushing has the right to conduct his financial services at any institution he wants.

But that does not mean that taxpayers should subsidize his financial services.

From a policy perspective does a person with Brian Cushing's financial wherewithal need taxpayer subsidized financial services?

Friday, August 23, 2013

Effective Tax Rate on S Corporations Is 31.6 Percent

A new study from the National Federation of Independent Business found that S corporations will face a 31.6 percent effective tax rate this year.

Read the study.

Wednesday, August 21, 2013

Credit Union of America Sponsors Tour Event

Wichita-based Credit Union of America announced that it has agreed to a two-year commitment as a sponsor of the Air Capital Classic.

According to the Wichita Eagle, the credit union signed on to become an Air Capital Classic Ambassador.

Is the credit union tax exemption meant to subsidy professional golf tournaments?

Read the story.

Tuesday, August 20, 2013

Civil Money Penalties

According to NCUA's website, the last time a federal credit union was assessed a civil money penalty was 2006 and that was for HMDA violations.

Since then, the agency has not reported fining any federal credit unions.

This either means federal credit unions are doing a stellar job, NCUA has decided to not report these fines, or NCUA has decided to not assess any fines.

If I was betting, my wager would be that this agency has decided to not assess any fines or not to report these civil money penalties.

Sunday, August 18, 2013

Credit Union to Pay over $200,000 for Unlawful Seizure of Social Security Disability Check

A Connecticut state court judge has ruled that the taking of Middletown resident Naomi Odell's $13,800 social security disability check by Wallingford Municipal Federal Credit Union amounted to a theft and awarded the woman more than $200,000 in damages.

The court "awarded Odell $41,403 in damages, another $41,403 in punitive damages, $21,443 in trebled interest, roughly $83,400 in attorney fees and costs for Faulkner, and $12,866 in attorney fees for Pothin.

Read more.

Thursday, August 15, 2013

Lawsuit Against Black Hills FCU and CUNA Mutual Receives Class Certification

In a major blow to CUNA Mutual Insurance Society and Black Hills FCU, the South Dakota Supreme Court overturned a trial court decision denying class certification.

The lawsuit alleges that CUNA Mutual Insurance Society and Black Hills Federal Credit Union wrongfully switched the credit disability insurance policies of 4,461 borrowers.

Read the opinion.

Loss of Tax Exemption Could Benefit CUs

Below is a video of Ken Kies discussing how two businesses that were previously tax exempt have prospered after their tax exemption was repealed.

Ken Kies is currently Managing Director of the Federal Policy Group, LLC. Mr. Kies served as the the Chief of Staff of the Congressional Joint Committee on Taxation from January 1995 until January 1998 and from 1982 until 1987 he was the Chief Republican Tax Counsel to the Ways and Means Committee of the United States House of Representatives.

Wednesday, August 14, 2013

Call Centers: Banks Outperform CUs

When it comes to answering phones, banks outperform credit unions, according to a survey by Moebs.

Banks do a better job of picking up after the first ring than credit unions, and, even when they don't, the median hold time is shorter at banks.

Banks and thrifts answer their phones 56 percent of the time on the first ring, and, when they don't, the median hold time is 42 seconds.

In comparison, 44 percent of credit unions surveyed had no hold times. When customers had to wait, the median hold time for credit unions was 90 seconds -- more than double the median hold time for banks.

Read the story in the Chicago Tribune.

Tuesday, August 13, 2013

Emergency Liquidity, Central Liquidity Facility and FHLB Advances

Unless credit unions have made arrangements to access the Federal Reserve's Discount Window, a vast majority of credit unions do not have a source of emergency liquidity with the closure of U.S. Central Bridge FCU last year.

At the end of June 2013, there were 140 regular members of the Central Liquidity Facility. While this is up from 95 federally-insured credit unions as of December 9, 2011; the number still represents a miniscule 2 percent of all federally-insured credit unions.

Moreover, NCUA Chairman Debbie Matz during a July 18 Town Hall Meeting re-iterated the agency's position that it is highly unlikely that Federal Home Loan Bank advances will be treated as a source of emergency liquidity.

NCUA Chairman Matz said:
"We believe that the Federal Home Loan Banks are a great resource for credit unions for the purpose that they were intended, which is to provide liquidity to meet mortgage needs. Federal Home Loan Banks are not an emergency source of liquidity. And so when we do ultimately have a rule – and we do not have a timetable for that yet – we do not anticipate that they will be qualified as end-users for emergency liquidity."

Monday, August 12, 2013

Large CU CEOs Earn More Than Bank CEOs

This may come as a surprise to most people; but CEOs at credit unions with at least $250 million in assets earn more than their counterparts at comparably sized banks.

A recent survey released by the Credit Union Executive Society found that:
  • the median base salary for a CEO at credit union with between $250 million to $499 million in assets is $236,125 compared to $221,053 for a bank CEO;
  • the median base salary for a CEO at a credit union with $500 million to $999 million in assets is $325,000 versus $275,206 for a bank CEO; and
  • for a CEO at a credit union with $1 billion or more in assets, the median base salary is $449,948. For a bank CEO, the median base salary is $383,750.

The same pattern holds for total compensation.

This may suggest that larger credit unions are diverting a portion of their tax exemption towards compensating their CEOs.

Sunday, August 11, 2013

A Tap on the Wrist

M.E.A. CU of Monticello, Illinois was cited and fined by the state regulator for improperly granting unsecured loans of $20,000 and $13,631.45 to two members, one of the members was on the credit union's board of directors.

According to Illinois Administrative Code the maximum unsecured loan for credit unions with between 0 and $500,000 in assets was $3,500.

When examiners discovered these regulatory violations during a March 28 exam, the state CU regulator gave the credit union until May 31, 2013 to cure the violations. The credit union manager informed the the state regulator that the two members would not comply with the remedial order.

The credit union supervisor then wrote the the credit union board member with the impermissible loan stating that the violation could result in a civil penalty for the credit union and her suspension or removal from the credit union's board. Rather than cure the violation, the person resigned from the board shortly after receiving the letter.

As a result, the credit union was fined a civil penalty of $100, which was nothing more than a tap on the wrist. The credit union could have received a fine up to $1,000.

Read the civil penalty notice.

Thursday, August 8, 2013

CU Lobbying Expenses Up 7 Percent from a Year Ago

According to, the credit union industry's lobbying expenditures were $2.47 million during the first quarter of 2013. This is up 7 percent from the first quarter of 2012.

The Credit Union National Association spent $1.24 million, while the National Association of Federal Credit Unions reported $850,000 in lobbying expenses.

The credit union with the largest lobbying expense was Boeing Employees Credit Union with $210,000.

In fact, lobbying spending by the credit union industry, adjusted for the size of the industry, is more than double the amount the banking industry is spending. Credit unions spent $2.33 on lobbying per $1 million in industry assets versus $1.08 per $1 million in assets for the banking industry.

Wednesday, August 7, 2013

Civil Suits Target Alabama One

The Tuscaloosa News is reporting that four lawsuits filed in Tuscaloosa County Circuit Court in July are seeking unspecified damages from Alabama One Credit Union and Tuscaloosa businessman Danny Ray Butler.

Three of the civil suits allege fraud and other actions involving the financing and ownership of three business projects.

The fourth lawsuit claims the credit union made an unauthorized transfer of money from a customer's equity line of credit account to Butler.

Read the story.

Tuesday, August 6, 2013

Why No Formal Enforcement Action?

I am still bothered by the fact that neither NCUA nor the California Department of Financial Institutions pursued a formal enforcement action against Telesis Community CU of Chatsworth, California.

I went back to Telesis Community's Material Loss Review and found that the credit unions had a composite CAMEL rating of 4 as early as September 2007. Credit unions with CAMEL ratings of 4 or 5 are designated as problem credit unions.

How is it that a credit union with a CAMEL 4 rating never entered into a formal enforcement order with its regulator?

Even when Telesis Community became a CAMEL 5 in June 2011, no formal agreement was issued. And this is not the only case.

If you look at other Material Loss Reviews for failed credit unions, you will see that same pattern. A credit union becomes a supervisory concern several years before it fails, but the agency never pursues a formal enforcement order; but rather followed informal actions.

Monday, August 5, 2013

DoD Military Finance Proposal Unneeded

ABA, NAFCU, and several other trade groups on August 1 wrote the Department of Defense (DOD) stating that current rules strike the right balance between protecting military financial customers and ensuring servicemembers have access to credit.

The DoD was soliciting comments on a proposal to expand the types of consumer credit covered by the Military Lending Act, which originally targeted refund anticipation loans, payday loans and car title loans for servicemembers.

The proposed expansion, the groups warned, would “increase costs, unnecessarily segregate the military, and possibly cause confusion for servicemembers and their families.” The groups cited research showing that prior regulations are “working as intended.”

The Military Lending Act’s provisions include stiff penalties for violations, oral disclosure requirements, a ban on mandatory arbitration and inflexible interest rates. If applied to more types of credit, the groups said, lenders may not be able to prudently offer credit to servicemembers.

Read the letter.

Friday, August 2, 2013

Federal Court Dismisses Challenge to Dodd-Frank

A federal judge dismissed a case challenging Dodd-Frank Act's constitutionality. U.S. District Judge Ellen Segal Huvelle said the case was "not ripe for review" because plaintiffs could not prove financial injury resulting from the Dodd-Frank Act.

Read more.

Almost $10 Million in NCUSIF Losses from Lynrocten Failure

According to a NCUA spokesperson, the losses to the NCUSIF from the failure of Lynrocten FCU (Lynchburg, VA) is estimated at approximately $10 million.

According to the credit union's March 2013 Call Report, the credit union had approximately $13.8 million in assets and $9.5 million in insured shares (deposits).

This would suggest a loss rate on insured shares approaching 100 percent.

Thursday, August 1, 2013

Use of Eminent Domain to Restructure Underwater Mortgages Is a Bad Idea

The mayor of Richmond, Calif., announced this week that the city has written 32 mortgage servicers offering to buy 624 underwater mortgages held by private-label mortgage-backed securities in order to refinance the loan to a lower payment.

If a servicer does not accept the offer, the letters say, “the City [may] decide to proceed with the acquisition of the Loans through eminent domain,” with the loan holder receiving court-determined compensation. The San Francisco Bay area city, hit hard by the bursting of the housing bubble, is offering 80 percent of what it says is “fair market value” for the loans as of June 30. (below is a sample letter sent by the mayor of Richmond)

Other cities have also threatened to use eminent domain to acquire underwater loans; but have not followed through on this threat.

However, the use of eminent domain to abrogate a contractual agreement between borrower and creditor will adversely impact the U.S. mortgage markets and in specific communities using eminent domain, the impact will be a significant contraction of credit availability.

In addition, ABA, credit union trade groups, and other housing finance trade groups wrote to House members on Monday to support an amendment that would prohibit the Federal Housing Administration from insuring residential mortgages seized through eminent domain.

In the letter, this coalition of trade groups wrote: "The amendment has become necessary because numerous communities across the country are considering a plan developed by a vulture fund that envisions using a municipality’s eminent domain power to acquire performing but underwater mortgage loans held in private-label mortgage-backed securities and then insure the new loans through the taxpayer-backed FHA."

Read the letter.

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