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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Year-over-year,

• 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.

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.

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.

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.

Not in the Military, Not a Problem

The title of this post is a line from a radio ad from Andrews Federal Credit Union (Camp Springs, MD), which is running in the Washington, D.C. market.

It is clear from this radio ad that Andrews Federal Credit Union is saying it is open to the public at large and there is no membership restrictions.

The National Credit Union Administration (NCUA) in 2013 warned federal credit unions that advertising that anyone can join -- "without any qualifying language -- can give the impression that the Federal Credit Union Act’s single or multiple common bond requirements do not apply. When this occurs, the advertisements are inaccurate or deceptive."

It seems to me that saying "not in the military, not a problem" in a radio ad could be viewed as inaccurate or deceptive.

If credit unions are going to advertise that they are open to all, then Congress should revisit their tax exemption.

North Dade Community Development FCU Fined $300,000 for BSA Violation

North Dade Community Development Federal Credit Union (Miami Gardens, FL) was fined $300,000 by the Financial Crimes Enforcement Network for violation of the Bank Secrecy Act (BSA).

According to the 16 page enforcement order, "North Dade’s BSA failures derived significantly from its banking services to certain money services businesses (“MSBs”). These MSBs were located outside of its geographic field of membership and were engaged in high-risk activities, such as wiring millions of dollars per month to high-risk foreign jurisdictions. For instance, in 2013 alone, the total transaction volume through North Dade by MSBs included $54.8 million in cash orders, $1.01 billion in outgoing wires, $5.3 million in returned checks, and $984.4 million in remote deposit capture. North Dade’s MSB activity accounted for 90% of North Dade’s total annual revenue in 2013."

Read the press release.

Texas Keeps CU Enforcement Actions Confidential

The November 2014 newsletter of the Texas Credit Union Department on page 3 stated that enforcement actions taken by the Texas Credit Union Department are confidential information, according to the Texas Finance Cose.

The newsletter noted that "determination letters, cease and desist orders, removal orders and documents related to these are confidential documents." The newsletter did note that only in rare and exceptional cases can the Commissioner make public these orders.

The newsletter also pointed out that conservatorship orders are protected from disclosure. I think members have the right to know when their credit union is taken over by the state.

Other state credit union regulators, such as Illinois, Washington, Oregon, and California, make these enforcement orders public.

The Texas legislature should amend its statute to allow for the publication of these enforcement orders.

Transparency and the preservation of the confidentiality of exam related documents are not mutually exclusive.

Read the newsletter.

Trade Groups Concerned about FHA Fee

Bank, credit union, and several other trade groups last week wrote to the leaders of the Senate Appropriations Committee urging them to remove a Federal Housing Administration administrative fee from the Senate’s spending bill for financial and housing agencies.

The provision, expected to raise $30 million for FHA quality assurance efforts, would allow the Department of Housing and Urban Development to charge a fee of no more than four basis points of the original principal balance of all FHA-insured mortgages a lender made in the previous fiscal year.

The groups expressed concerns about the fee’s retroactivity, which will make it harder for lenders to predict their costs, and about the overall size of the fee.

Read the letter.

Projected NCUSIF Premiums for 2015 Will Range Between 0 and 5 Basis Points

Credit union premiums to the NCUSIF will range between 0 and 5 basis points for 2015, according to a presentation to the NCUA Board.

However, credit unions will not be subject to any Temporary Corporate Credit Union Stabilization Fund assessments in 2015.

Review the slideshow.

Should Credit Unions Disclose Material Events?

On October 31, 2014, the University of Wisconsin Credit Union issued a press release stating it took an investment loss contingency charge of $13.1 million against year-to-date earnings due to an investment in fraudulent USDA guaranteed loans.

I think we would all agree that a $13.1 million contingency charge is a material event.

I also believe the credit union did the right thing in disclosing this material event, even though it did not have to disclose this information.

However, such disclosures of material events are very rare from credit unions.

But shouldn't credit union members be made aware of events that may adversely impact the credit union?

After all, credit unions claim their members are owners. And owners have a right to know if their credit union has been affected by a material event.

47 CUs Miss Q3 Call Report Filing Deadline

The number of federally insured credit unions filing their Call Reports late in the third quarter was 47. This is down from 75 credit unions that missed the second quarter Call Report filing deadline.

Only one credit union was late in filing its Call Report in both the second and third quarters.

Forty of the late-filing credit unions have assets of less than $50 million. The other seven credit unions had between $50 million and $250 million in assets.

The imposition of civil money penalties earlier this year by NCUA has improved compliance by credit unions in meeting the filing deadline.

Read the press release.

United Nations FCU Launches Mortgage Loan Program Targeting Doctors and Dentists

United Nations Federal Credit Union (UNFCU) has launched a mortgage lending program targeting medical and dental professionals purchasing primary residences in the United States.

The initiative enables doctors to join UNFCU through its partnership with United Nations Association of the United States of America. The credit union is using this association as a vehicle to circumvent field of membership restrictions.

Moreover do doctors and dentists really need taxpayer subsidized financial services?

It seems that the benefit from the credit unions' preferential tax treatment is going to people in the upper portion of the income distribution.

This is just another example of credit unions straying from their mission of serving people of modest means.

Read the press release.

Comments Needed on Petition to Remove Barriers to Time-Sensitive Mobile Calls and Texts

Currently, the Telephone Consumer Protection Act restricts automated calls to mobile devices.

In an October 22 blog post, I wrote that ABA had petitioned the Federal Communications Commission (FCC) to remove barriers to time-sensitive mobile calls and texts that financial institutions use to reach their customers when their accounts may be compromised.

The FCC has requested public comment on the petition. Comments are due by December 8, 2014.

Removing these barriers will allow banks and credit unions to better serve their customers (members).

I hope you will comment.

Read the public notice.

Fraudulent USDA Guaranteed Loans Sting University of Wisconsin CU

The Milwaukee Journal Sentinel is reporting that University of Wisconsin Credit Union (Madison, WI) has taken a $13.1 million "loss contingency" charge due to an alleged fraud scheme involving fake U.S. Department of Agriculture guaranteed loans.

University of Wisconsin Credit Union disclosed it had invested in the nonexistent USDA loans through Milwaukee-based Pennant Management Inc.

News reports are alleging that Nikesh A. Patel, a prominent hotelier in Orlando, Florida and operator of First Farmers Financial LLC, sold $176 million in fake USDA-backed loans to various investors.

Read the story.

Read press release.

Bank and CU Trade Groups Refute Misleading Claims by Retailers

Trade groups representing banks and credit unions yesterday wrote to Congress to rebut “inaccurate and misleading” arguments from retailers for a uniform federal law governing data breach notification.

“Financial institutions have developed and maintain robust internal protections to combat criminal attacks and are required by federal law and regulation to protect this information and notify consumers when a breach occurs that will put them at risk,” the financial groups wrote. “In contrast, retailers are not covered by any federal laws or regulations that require them to protect the data and notify consumers when it is breached.”

The letter described to congressional leaders the strong data security structure employed by banks and credit unions, noting that retailers do not have similar internal safeguards or external oversight. “It is only when coupled with the development of strong internal data protection standards and robust oversight that the retail community will find itself in a better position to protect consumers and their confidential personal financial information from criminal abuse,” the groups wrote.

Read the letter.

Credit Unions Jumping into Wealth Management

The Silicon Valley Business Journal reported on local credit unions entering into the wealth management business.

Diana Dykstra, president and CEO of the California and Nevada Credit Union Leagues, stated that she believes this movement into wealth management is a natural progression for some credit unions, especially those that serve a more affluent population.

For example, Technology Credit Union has a 15-person in-house team dedicated to wealth management. The credit union plans to start offering trust services in 2015.

However, the article notes that targetting services for affluent customers can blur the line between credit unions and big banks.

Read the article.

Once Again, NCUA Fails to Disclose Enforcement Order

During the closed National Credit Union Administration (NCUA) Board meeting on October 23, the NCUA Board considered an administrative enforcement action under Section 206 of the Federal Credit Union Act.

The agency also decided to keep this administrative enforcement action confidential.

However, keeping administrative enforcement actions confidential was not the intention of Congress, when it enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Congress wrote that the federal banking agencies, including NCUA, were to make public administrative enforcement orders.

While the Federal Credit Union Act does allow NCUA to not publish an administrative enforcement action if it is in the public interest, I believe lawmakers wanted this discretionary authority to be rarely used.

NCUA's fears that such disclosures will harm a credit union is ill-founded. There is no evidence that the publication of an enforcement order will harm a depository institution.

By keeping this administrative enforcement action confidential, the NCUA Board is once again thumbing its nose at the rule of law.

CUNA Could Not Save Senator Udall and Other CU Supporters

The Credit Union National Association (CUNA) spent $1.2 million on independent expenditures and $1.4 million on partisan communications during this mid-term election cycle.

Despite these expenditures, some high-profile credit union supporters lost their elections.

The biggest loss on election night was Senator Mark Udall (D), who is the chief Senate sponsor of a bill that would increase the credit union member business lending cap from 12.25 percent of assets to 27.5 percent of assets. Senator Udall was defeated by Rep. Cory Gardner (R) in the Colorado Senate race. CUNA spent $400,000 on direct mail to credit union members urging them to support Udall.

In the Iowa Senate race, CUNA-supported Rep. Bruce Braley (D) was defeated by Republican Iowa State Senator Joni Ernst. CUNA spent approximately $265,000 on a series of eight mailers for Rep. Braley, who is a cosponsor of several pro-credit union bills in the House of Representatives.

In California's 25th District, Republican Tony Strickland lost to fellow Republican Steve Knight. CUNA spent $99,000 for Rep. Strickland with the money going to direct mail production and postage.

In Florida, Rep. Steve Southerland (R) lost his bid for a third term in the 2nd District, falling to Democrat Gwen Graham. CUNA spent $176,340 in television advertisements for Rep. Southerland.

Hear No Evil, See No Evil, Speak No Evil

Bank regulators -- Federal Deposit Insurance Corporation, Federal Reserve, and Office of the Comptroller of the Currency - are aggressively pursuing banks for violations of the National Flood Insurance Act.

However, I have not seen the same regulatory zeal from the National Credit Union Administration (NCUA) regarding credit union flood insurance compliance.

In fact, I don't recall NCUA publicly citing any credit unions in recent history for flood insurance violations.

It is hard to believe that there is not a single credit union out of compliance with the flood insurance requirements. After all, there are over 6,000 credit unions and credit unions accounted for 7 percent of all mortgage originations, according to the 2013 HMDA data.

I suspect the dearth of flood insurance violations is because NCUA fails to do a deep dive into credit union books regarding flood insurance compliance.

So, while banks and credit unions are subject to the same requirements on flood insurance, there are differences between bank and credit union regulators with regard to the enforcement of these requirements.

NCUA would rather hear no evil, see no evil, and speak no evil about credit unions.

NCUA Lacks BSA Transparency

The Federal Deposit Insurance Corporation's Office of the Inspector General recently released a report looking at FDIC's respose to Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) concerns at FDIC examined banks.

The report looked at a four-year period between October 1, 2009 and September 30, 2013.

The audit repoted on the number of BSA examinations and visitations conducted by FDIC and state banking agencies. The report also provided summary statisitics for each fiscal year on:

• the number of banks cited for apparent BSA violations,
• the number of apparent violations,
• the number of formal and informal enforcement actions imposed on FDIC-supervised banks,
• and the number of referrals to the Financial Crimes Enforcement Network (FinCen) for the issuance of Civil Money Penalties (CMP).

The report found that during the four-year period

"the FDIC and/or applicable state regulator cited FDIC-supervised institutions for 3,294 apparent violations of BSA-related regulations, agreed to or issued 175 BSA-related informal and formal enforcement actions, and made 22 referrals to FinCEN for CMPs."

However, the National Credit Union Administration (NCUA) with the exception of a few published enforcement orders does not disclose any information regarding BSA and AML concerns at NCUA examined credit unions.

As a matter of transparency, NCUA should publish summary statistics regarding BSA and AML concerns at credit unions. For example, FDIC in its annual report publishes the number of BSA examinations and the number of consent orders and memoranda of understanding that are based in whole or in part on apparent BSA violations.

In addition, NCUA's Office of the Inspector General needs to conduct an audit of the agency with regard to BSA supervision. This issue has not been the focus of an an Inspector General audit over the last 15 years.

It seems that such an audit is well overdue.

Read the FDIC Audit Report.

Self-Help FCU Can Pay for Branch in Underserved Fresno Community

The Fresno Bee is reporting that the Fresno Economic Opportunities Commission has signed an agreement with the Self-Help Federal Credit Union (Durham, N.C.) to open a branch in south Fresno.

According to the article, the Fresno Economic Opportunities Commission has raised $400,000 of the $600,000 needed to open the branch. The organization is seeking donations for the remaining $200,000.

However Self-Help FCU's financial statements show that the credit union does not need this subsidy from the Fresno Economic Opportunities Commission to open a south Fresno branch.

The credit union has $550 million in assets. For 2013, it reported a profit of $4.4 million and a return on average assets of 0.91 percent. Through the first six months of 2014, Self-Help FCU is reporting a profit of $2.9 million, which translates into a return on average assets of 1.06 percent.

Does it make sense for this poverty-fighting organization to use its scarce resources to provide a branch to a credit union that has the wherewithal to fund its own facility?

OCC: Auto Lending Risk Growing

In a speech to the 22nd Annual Financial Services Collections and Credit Risk Conference, Darrin Benhart, Deputy Comptroller for Supervision Risk Management for the Office of the Comptroller of the Currency (OCC), spoke about the increased risk the OCC is seeing in auto finance.

While the OCC regulates national banks and federal thrifts, Benhart's comments should resonate with credit unions.

He noted that increased comeptition is causing an easing of underwriting standards.

Benhart said:

Competitive pressure is driving some auto lenders to pursue growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. The marketing of these loans is focusing more on monthly payment, with little attention to the overall debt of the borrower. Average loan-to-value, or LTV rates for both new and used vehicles are getting more liberal and exceeded 100 percent for all major lender categories at the end of 2013. These high LTVs reflect both rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance, and aftermarket accessories into the financing.

While Benhart acknowledges that there has not been a large-scale deterioration in loan performance at the portfolio level, the agency is clearly seeing increased signs of risk.

In addition, Benhart pointed out another troubling trend -- the average loss per vehicle has risen significantly over the past 24 months across all types of lenders. He stated that this is a by-product of higher LTVs and longer terms on auto loans.

Read Benhart's speech.

Island FCU Enters into $7 Million Sponsorship Agreement with Stony Brook University

Stony Brook University and Island Federal Credit Union (Hauppauge, NY) have agreed to a $7 million, 10-year corporate advertising sponsorship agreement.

The deal will give the credit union the exclusive naming rights to the school's new 4,000-seat arena. The new arena will be called Island Federal Credit Union Arena.

The credit union will also be the title sponsor of the film festival at Staller Center and several other campus programs for the next decade. Additionally, the agreement calls for two retail banking branches and ATMs at various locations on campus.

While the sponsorship agreement will probably enhance the credit union's brand, it also represents a misuse of the credit union's tax exemption.

Read the press release.

CUNA Spending Big This Election Cycle

Forget about the image of credit unions being the little guy, credit unions have become a big-time special interest group in Washington, D.C.

According to a story in The Hill, the Credit Union National Association (CUNA) and its political action committee, the Credit Union Legislative Action Council, have spent $5.6 million during the 2014 election cycle.

The article notes that "[s]o far, $3 million has been spent on direct PAC contributions, $1.2 million on independent expenditures and $1.4 million on partisan communications.

More than 80 separate pieces of direct mail, resulting in more than 2.1 million individual mailings, have been sent to more than 417,000 credit union members" in several tight races."

Beyond direct mailings, the article also points out that CUNA is running television, radio and online advertisements for candidates.

Clearly, if tax-exempt credit unions can spend almost $6 million to influence election outcomes, then credit unions can afford to pay corporate income taxes.

Read the article.

SECU Foundation to Pay $1.5 Million for Naming Rights to Asheville Plaza

The Asheville Art Museum is seeking approval from Asheville City Council to sell the naming rights of its outdoor plaza in the heart of downtown to the North Carolina State Employees’ Credit Union Foundation.

The tentative deal calls for renaming the public space at the corner of Biltmore and Patton Avenue “SECU Plaza.” The SECU Foundation would pay $1.5 million to the museum in exchange for the designation and an accompanying sign.

Council will consider the naming rights proposal at its October 28 meeting. A report from city staff recommends that Council approve the request, noting: “This naming rights opportunity will assist the Art Museum in raising the funds it needs.”

If approved, the “SECU Plaza” name would apply for the entirety of the museum’s current 30-year lease with the city.

Earlier this year, SECU Foundation bought the naming rights to a state-of-the-art education center at the NC Museum of Arts and a memorial walkway around the Battleship North Carolina.

Update: Asheville City Council unanimously approved the deal on October 28.

Read the story.

Read the staff report.

Problem Credit Union Update, Q3 2014

The number of problem credit unions declined by 7 during the third quarter of 2014 to 288 credit unions.

A problem credit union is defined as a credit union with a CAMEL rating of 4 or 5.

Assets at problem credit unions declined from $14.9 billion as of June 2014 to $14 billion as of September 2014. Deposits (shares) at problem credit unions fell from $13.2 billion at the start of the third quarter to $12.4 billion at the end of the quarter.

According to NCUA, problem credit unions held 1.38 percent of the industry's insured deposits and 1.3 percent of the industry's assets.

While the vast majority of problem credit unions are smaller institutions, the bulk of the shares are in credit unions with $100 million or more in assets.

The number of problem credit unions with $500 million or more in assets declined from 8 to 6 during the third quarter. At the end of the quarter, these 6 problem credit unions held $4.5 billion in shares.

The number of problem credit unions with between $100 million and $500 million in assets increased by 3 to 22 credit unions with total shares of $4.2 billion.

NCUA Fines 44 Credit Unions for Late Filing Their Call Reports​

The National Credit Union Administration fined 44 credit unions for missing the deadline to file their second-quarter Call Reports.

The late filers will pay a total of $17,111 in penalties. Individual penalties range from $52 to $1,824. The median penalty was $256.

The size of the civil penalty depended on three factors: the credit union’s asset size, its recent Call Report filing history and the length of the delay.

Four of the credit unions assessed penalties had been late in the previous quarter.

Read the press release.

For a list of late filers, click here..

Remove Barriers to Time-Sensitive Mobile Calls and Texts

ABA last week asked the Federal Communications Commission to remove barriers to time-sensitive mobile calls and texts that financial institutions use to reach their customers when their accounts may be compromised.

ABA requested exemptions for communications that would alert customers to potentially fraudulent transactions, actions needed to complete pending money transfers and actions necessary to respond to data breaches.

ABA filed the petition because class action suits filed under the Telephone Consumer Protection Act currently limit financial institutions’ ability to offer these communications, even though most consumers prefer mobile fraud and security alerts.

Read the petition.

Is the Taxi Medallion Asset Bubble Collapsing?

Disruptive technologies, like Uber and Lyft, are undermining the value of taxi medallions.

The New York Post is reporting that taxi fleets have lost between 10 percent to 15 percent of their drivers to app-based livery services.

As a result, the price of taxi medallions have dropped by almost 15 percent in the last four months after surging in the first half of this year.

According to Mitchell Reiver of the Melrose Credit Union -- a credit union that specializes in financing taxi medallion purchases, the price of taxi medallions has fallen from $1.05 million four months ago to about $850,000 on average.

The story further notes that the credit union is currently negotiating a medallion sale for $825,000. So, it appears that taxi medallions prices have not found a floor.

This plunge in taxi medallion prices should make credit union regulators nervous, especially with regard to credit unions that are overly exposed to this market.

I suspect these credit unions will be subject to greater scrutiny going forward to ensure that they do not pose a risk to the National Credit Union Share Insurance Fund.

In fact, NCUA in April 2014 issued guidance to credit unions that were engaged in taxi medallion lending or participated in these loans.

Read the article.

FAQ: When Are CUs Included in Regulatory Analysis of Bank M&A Deals?

Last week, the Federal Reserve published answers to a frequently asked questions (FAQ) document to help bankers understand how the Federal Reserve and the Justice Department evaluate proposed merger and acquisition (M&A) activities.

The FAQ includes a discussion about when the Federal Reserve includes credit unions in the Herfindahl-Hirschman Index (HHI) calculation, which measures market concentration, and under what circumstances would a credit union receive a 100 percent weighting in the HHI calculation.

When are credit unions included in the HHI calculations?

If an application exceeds the delegation criteria in a given market in the initial screen, Board and Reserve Bank staff will consider whether any credit unions should be included in the structural concentration calculations, because they exert competitive pressure on banks in the market. Credit unions are typically included in these calculations if two conditions are met: (1) the field of membership includes all, or almost all, of the market population, and (2) the credit union's branches are easily accessible to the general public. In such instances, a credit union's deposits will be given 50 percent weight.

Under what circumstances would a credit union get 100 percent weight in the HHI calculation?

If a credit union has significant commercial lending and has staff available for small business services (special tellers, lending officers, business-only teller windows, etc.), then its deposits may be eligible for 100 percent weighting. To date, it has been very rare for a credit union's deposits to receive more than 50 percent weight.

Total C&I lending as a percentage of assets is an important factor in this consideration. The C&I lending of a credit union includes C&I loans, unsecured business loans, and unsecured revolving lines of credit for business purposes.

However, business loans secured by real estate and construction loans are not counted as C&I loans.

The FAQ also discusses the circumstances when the Justice Department's Antitrust Division (Division) includes credit unions in its analysis.

The Division may include the deposits of a credit union in the HHI analysis if the credit union meets certain criteria. Similar to the conditions set forth by the Federal Reserve, to be considered an active competitor in retail banking, a credit union must have a community-based field of membership, making it easily accessible to customers looking for banking alternatives in the market. For small business banking, the Division will evaluate factors similar to those considered in the analysis of thrifts to determine whether a credit union is an active competitor. Unlike thrifts, however, credit unions do not provide deposit data to the FDIC. Reliable branch-level data may not be readily available for HHI calculations. Therefore, in such cases, the presence of credit unions that meet these criteria will be considered a mitigating factor in evaluating the competitive effects of a transaction.

Read the FAQ.

Community First CU to be Title Sponsor of Jacksonville's Light Boat Parade

Community First Credit Union has agreed to be a title sponsor of Jacksonville's Light Boat Parade for at least the next three years.

Organizers hope to have at least 100 boats participate in the parade. After the boat parade, there will be a fireworks show.

Community First and Gator Bowl Sports declined to disclose the dollar amount for the credit union’s sponsorship.

But is sponsoring a boat parade consistent with the tax-exempt purpose of a credit union?

Read more.

Who Benefits When CUs Merge?

A paper by Bauer, Miles, and Nishikawa found gains to the owners/members of the target credit union and to the regulators but not to the acquiring credit union.

The paper examines pre-merger versus post-merger performance of credit unions between between 1995 and 2003. The study treats all mergers as the same whether the merger is between willing partners or a purchase and assumption agreement (P&A) between the acquiring credit union and the National Credit Union Share Insurance Fund (NCUSIF). The paper notes that less than 10 percent of the mergers involved P&As with the NCUSIF.

The paper found that members of the target credit union experienced a net gain from the merger.

The study also found that the performance of acquiring credit unions is little affected by the merger. If an acquiring credit union makes some financial adjustments to a merger, these changes tend to favor borrowers at the expense of savers.

Furthermore, the study found evidence to support the hypothesis that most mergers are instigated by regulators to avert using NCUSIF to resolve failing credit unions. The authors posit that the acquiring credit union may do the merger to avoid any disutility to its members that may arise from impact of the failed credit union on the NCUSIF.

Read the paper.

Free Checking Means Free

The Consumer Financial Protection Bureau (CFPB) is once again doing regulation via enforcement action. This time, the CFPB is cracking down on financial institutions that are deceptively advertising free checking accounts.

CFPB Director Richard Cordray commenting on an October 9 enforcement order against M&T Bank stated that banks and credit unions "cannot misstate to consumers whether a financial product or service is free."

The CFPB wrote that consumers were lured by M&T Bank with promises of “no strings attached” free checking, but the bank failed to disclose key eligibility requirements for the account.

The CFPB noted: "None of the advertisements for Free Checking disclosed either the minimum activity requirement or the automatic conversion of a Free Checking account ... after 90 days of inactivity."

The CFPB press release stated that banks and credit unions are prohibited from deceptively advertising deposit accounts. If an account is described as free or no cost, it cannot, for example, have any maintenance or activity fees, or any fees to deposit, withdraw, or transfer money.

According to the CFPB, the failure to disclose these eligibility requirements is a deceptive act or practice.

Read the press release. Read the consent order.

County & Municipal Employees CU Closed

The Texas Credit Union Department liquidated County & Municipal Employees Credit Union of Edinburg, Texas, and named the National Credit Union Administration as liquidating agent.

Navy Army Community Credit Union of Corpus Christi, Texas, immediately assumed County & Municipal Employees Credit Union’s members, assets, shares and selected loans.

The Texas Credit Union Department made the decision to liquidate County & Municipal Employees Credit Union and discontinue operations after determining the credit union was insolvent with no prospect for restoring viable operations on its own.

The credit union reported a loss of almost $3.4 million through the first nine months of 2014. As of the end of the third quarter, the credit union was critically undercapitalized with a net worth ratio of 0.85 percent. Also, 21 percent of the credit union's loans were 60 days or more delinquent.

County & Municipal Employees Credit Union had assets of $40.3 million and served 7,173 members, according to the credit union’s most recent Call Report.

County & Municipal Employees Credit Union is the ninth federally insured credit union liquidation in 2014.

Read the press release.

CU Discount Window Borrowings, Q3 2012

During the third quarter of 2012, 48 credit union borrowed from the Federal Reserve's Discount Window.

The Federal Reserve releases this information with a two year lag.

The total number of transactions with the various Federal Reserve Banks during the quarter was 130.

Three credit unions accounted for almost half of the total number of borrowings. These credit union borrowers were Greater Springfield Credit Union (14), Northwest Community Credit Union (23), and Sun Community Federal Credit Union (27). The number of times they borrowed from the Discount Window appear in parenthesis.

The average amount borrowed was almost $4.3 million, while the median amount borrowed was $1.25 million.

The maximum amount borrowed was $50 million by Northwest FCU (Herndon, VA).

With the exception of two credit unions that access the Federal Reserve's seasonal credit program, all other borrowings were through the Federal Reserve's primary crdit program, which is reserved for healthy institutions.

Below is a list of credit unions that borrowed from the Federal Reserve by the date the loan was originated and the amount borrowed.

No Opposition, Really?

During the September 18 NCUA Board meeting, an NCUA staffer stated there was no opposition to the expansion of First Service FCU's community charter to eight counties in Columbus, Ohio metropolitan statisitcal area.

According to the official transcript of the meeting, new NCUA Board member J. Mark McWatters asked Leilani Stamper, Consumer Access Analyst for the Office of Consumer Protection: "Is there any opposition to this motion?"

Leilani Stamper replied: "No."

J. Mark McWatters asked: "There’s no opposition?"

Leilani Stamper once again replied: "No."

But how did Leilani Stamper know there was no opposition?

NCUA does not request comments from the public regarding a conversion to a community charter or an expansion of a community charter.

The agency failed to adopt its proposal from 2007 that would have required notice and request for comment for those community charter applications that do not meet the established definitions of a well-defined local community.

The simple fact is that Ms. Stamper cannot know if there was any opposition to this community charter application.

Security Service Advertising Large Commercial Loans

Security Service Federal Credit Union (San Antonio, TX) ran an ad in the September 28th Caller Times promoting commercial loans from $5 million to $50 million.

Business loans ranging in size from $5 million to $50 million are not small business loans.

Is the credit union tax exemption meant to subsidize multi-million dollar commercial loans?

Why Hasn't NCUA Toughened Its Regs for Low-Income CUs Exceeding the MBL Cap?

Slightly more than two years ago, the National Credit Union Administration (NCUA) through regulatory fiat streamlined the process for federally insured credit unions to receive a low-income designation. As a result, the number of low-income credit union have approximately doubled to 2100 and are no longer subject to the member business loan (MBL) cap of 12.25 percent of assets.

However, NCUA has not put in place regulations to ensure that these low-income designated credit unions with their authority to do unlimited business lending do so in a safe and sound manner.

But only a year earlier in 2011, NCUA sang a different tune when it testified before the Senate Banking Committee regarding a bill to allow qualified credit unions to exceed the MBL cap up to 27.5 percent of their assets.

In her oral statement, NCUA Chairman Debbie Matz stated that if legislation was enacted that would raise the MBL cap, "NCUA would promptly revise our regulations to ensure that additional capacity in the credit union system would not result in unintended safety and soundness concerns."

In response to a question from Senator Shelby (R - AL) about whether a credit union should have a high CAMEL rating before the credit union can exceed the business loan cap, Chairman Matz stated:

"I think that they should have -- particularly on the management, the "M" in CAMEL, I think that they should have a high CAMEL rating in order to go beyond the bottom tier."

Moreover, responding to a question for Senate Banking Committee Chairman Johnson (D - SD) about tiered approval process for credit unions to exceed the MBL, Chairman Matz stated that the agency would implement "regulations to ensure ... that the credit unions that go above the cap do so in a moderate way, that they crawl before they walk."

Unfortunately, talk is cheap. Actions speak louder than words.

You would think that if NCUA was contemplating these regulatory changes with regard to a bill raising the MBL cap to 27.5 percent of assets, the agency would do the same when it has exempted almost one-third of the credit union industry from the MBL cap through its low-income designation.

Republic Hose Employees FCU Liquidated

The National Credit Union Administration liquidated Republic Hose Employees Federal Credit Union of Youngstown, Ohio.

NCUA made the decision to liquidate Republic Hose Employees Federal Credit Union and discontinue operations after determining the credit union was insolvent and had no prospect for restoring viable operations.

As of June 2014, the credit union was adequately capitalized. Almost 7 percent of its loans were delinquent. The credit union reported a loss for all of 2013 and the first half of 2014.

Republic Hose Employees Federal Credit Union served 455 members and had assets of $581,487.

Read the press release.

The Great Divide

Second quarter financial performance data for federally-insured credit unions show that there is a growing divide between the largest credit unions and smallest credit unions.

Large credit unions -- those with more than $500 million in assets -- reported a return on average assets of 96 basis points, while small credit unions with less than $10 million in assets reported a loss with a return on average assets of minus 5 basis points.

Eight hundred and forty small credit unions reported a loss through the first six months of 2014. In addition, only 894 small credit unions (or 43 percent of small credit unions) reported higher earnings for the first six months of 2014 compared to a year earlier.

In comparison, only 3 credit unions with more than $500 million in assets reported losses through the first half of 2014. Also, 231 out of 448 large credit unions (or nearly 52 percent of large credit unions) reported higher earnings through the first half of 2014 compared to the same time period in 2013.

In addition, small credit unions posted negative growth rate in net worth, membership, and loans during the first six months of 2014.

Large credit unions, on the other hand, reported that net worth grew by 9.69 percent, membership increased by 6.35 percent, and loans expanded 10.9 percent.

Credit Unions, Starter Interrupter Devices, and Collections

The New York Times is reporting that First Castle Federal Credit Union in Covington, La. is using starter interrupter devices to track the location of the cars that it has financed.

According to the article, the head of collections for the credit union, Lionel M. Vead Jr., uses the device to monitor the movements of about 880 subprime borrowers on a computerized map. If a borrower has fallen behind on his or her payment, Mr. Vead can remotely disable the vehicle from his computer or mobile phone.

The article quotes Mr. Vead about disabling a car while shopping at a Walmart.

He noted that once he disabled the vehicle, the borrower will call him within minutes looking to make the payment.

He is also encouraging other credit unions to use the technology.

Moreover, Lender Systems of Temecula, Calif., which sells a range of starter interrupt devices, has seen its revenues more than doubled so far this year, buoyed by an influx of new credit union customers.

However, this practice, while improving collections, does raise privacy concerns. 

Read the story.

Credit Unions and Jumbo Mortgages

An article in The Wall Street Journal advises readers to look at credit unions for jumbo mortgages; but also warns readers to shop around.

The article points out that credit unions have grown their market share of mortgages from 3 percent to 10 percent over the past decade; but jumbo mortgages remain a small part of the total mortgage volume of most credit unions.

In general, it is the larger credit unions, like Navy FCU (Vienna, Va.), Bethpage FCU (Bethpage, NY), and PenFed (Alexandria, Va.), that are making these loans, although some smaller credit unions originate jumbo mortgages for relationship building.

Those credit unions that are offering jumbo mortgages tend to operate in markets with higher real estate prices, such as Washington, D.C., California, and Long Island, NY.

However, the article points out that interest rates on credit union jumbo mortgages are not necessarily lower than those offered by banks or other lenders and the amount that credit unions have to lend tends to be smaller.

Therefore, if you are looking for a jumbo mortgage, it pays to shop around.

Read the article (subscription required).

Appeals of Material Supervisory Determinations

A paper by Julie Andersen Hill at a conference sponsored by Federal Reserve System/Conference of State Bank Supervisors examined appeals of material supervisory determinations (MSDs) by financial institutions to the various federal banking agencies.

Beginning on page 47 of the paper, the author looks at the appeal process for the National Credit Union Administration.

According to the paper, there were 140 contacts by credit unions with NCUA Region Offices between 2002 and 2012. Ninety percent were by federal credit unions and 10 percent were by state chartered credit unions.

The paper found that "disagreement over CAMEL composite or component ratings was the most common reason that credit unions used the MSD appeals process. Additionally, 47 appeals involved a document of resolution."

However, the paper noted that credit unions rarely succeeded in overturning the initial examination determination, as seventy percent of the appeals upheld the initial examiner decision. In less than 20 percent of the appeals did the Region Office amend the MSD.

Moreover, very few appeals were filed with NCUA's Supervisory Review Committee (only six between 1995 and 2012) and the Supervisory Review Committee in each instance upheld the examiners' decisions.

The paper also pointed out differences between NCUA and the other federal banking agencies regarding their appeal processes.

For example, the OCC, Federal Reserve, and FDIC allow financial institutions to appeal any examination rating. The NCUA, however, only allows appeals of composite CAMEL ratings of 3, 4, and 5 and all component ratings of those composite ratings. The author concluded that this means credit unions have less access to an appeals process compared to other financial institutions.

The author concludes that federal banking regulators need to strengthen their MSD appeals process. This would include giving financial institutions direct access to a dedicated appellate authority outside of the examination function; requiring the appellate authority to employ a clear and rigorous standard of review; and disclosing detailed information about each decision reached by the appellate authority.

AgFed Using Group to Circumvent FOM Limitation

Washington, D.C.-based Agriculture Federal Credit Union (AgFed) must stop advertising that “everyone is welcome” to join, ABA said in a letter on September 22 to the National Credit Union Administration.

ABA cited AgFed’s website, which says “Everyone is welcome. Join today.” AgFed invites ineligible individuals to join by becoming members of CityDance for $20.

ABA urged NCUA to order AgFed not to advertise that everyone can join and to conduct a quality assurance review of CityDance to ensure that it truly meets the associational common bond requirement.

NCUA last year warned credit unions to avoid “overly aggressive marketing campaigns ... providing consumers with misleading information about single and multiple common bond membership requirements.” The agency is also conducting reviews of third-party groups that CUs use to circumvent common bond requirements.

Read the letter.

TILA Rescission Case

The Supreme Court will hear arguments in November that will be of interest to all lenders that originate mortgages.

The question before the Supreme Court is:

Does a borrower exercise his right to rescind a transaction in satisfaction of the requirements of Section 1635 of the Truth in Lending Act (“TILA”) by “notifying the creditor” in writing within three years of the consummation of the transaction, as the Third, Fourth, and Eleventh Circuits have held, or must a borrower file a lawsuit within three years of the consummation of the transaction, as the First, Sixth, Eighth, Ninth, and Tenth Circuits have held?

TILA gives certain borrowers a right to rescind their mortgage loans. Although that right typically lasts for three days from the time the loan is made, 15 U.S.C. § 1635(a), it can extend to three years if the creditor fails to make certain disclosures required by TILA, 15 U.S.C. § 1635(f).

The American Bankers Association along with other trade groups filed a friend-of-the-court brief urging the Supreme Court to uphold the appellate court decision in Jesinoski v. Countrywide. The appellate court in Jesinoski ruled that to rescind a mortgage, a borrower must file a lawsuit before three years are up, as most other appellate circuits have found.

The petitioners are urging the Supreme Court to find that a written notice of intent to rescind a mortgage is sufficient within the three-year window.

ABA and the other groups argued that the petitioners’ approach, however, would “fundamentally undermine the finality and clarity Congress intended this statute to provide.”

Moreover, the petitioners' approach would allow a borrower to strip a creditor of its security interest instantaneously and unilaterally — even if the creditor complied fully with TILA. But most importantly, it would cast a shadow of uncertainty over the housing finance market, resulting in additional costs to borrowers.

Read the brief.

No Follow Up Report on September 2013 Community Charter Approval

A year ago, the NCUA Board approved an expansion of the community charter for Peoples Advantage Federal Credit Union to serve the Richmond (VA) Metropolitan Statistical Area.

But the transcript from the September 2013 NCUA Board meeting shows that Board member Michael Fryzel expressed deep reservations about the ability of the credit union to serve this expanded community charter. He requested a follow up report from staff to the NCUA Board one year after the community charter approval on how the "credit union is doing and what part of their new market they're penetrating and if they are achieving the goals they said they would in their marketing plan."

Well, it is one year later. Fryzel is no longer on the NCUA Board and there was no report to the NCUA Board at its September 2014 meeting on how the credit union is doing in serving this expanded community.

Out of sight, out of mind.

Disability as a Common Bond

Is a disability a common bond?

For at least one credit union, the answer is yes.

Veridian Credit Union (Waterloo, Iowa) states that part of its field of membership includes "individuals with disabilities as defined by the Americans with Disabilities Act of 1990 who are living in the State of Iowa."

To read how the Americans with Disabilities Act defines the term disabilities, click here.

But the big question is how do individuals with disabilities meet the requirements for a common bond?

Section 533.202 of the Iowa Code states that "[s]tate credit union organization shall be available to groups of individuals who have a common bond of association such as, but not limited to, occupation, common employer, or residence within specified geographic boundaries."

If you dig into the state's administrative code, it defines the various types of common bond.

But I have a hard time comprehending how individuals with disabilities as defined by the Americans with Disabilities Act meets the state's common bond requirements.

This is just another example of credit unions pushing the boundary with regard to common bond and a credit union regulator abetting the effort.

CFPB Needs to Provide Written Guidance on TILA-RESPA Merger

Sixteen trade groups on September 16 asked the Consumer Financial Protection Bureau (CFPB) for additional written guidance to help the industry implement the merger of the Truth in Lending Act and Real Estate Settlement Procedures Act disclosures, which takes effect Aug. 1, 2015.

Specifically, the groups sought clear written guidance addressing the industry’s implementation questions. “We appreciate the bureau offering oral guidance through webinars, and other channels,” they said. But “uniform written guidance developed with stakeholders’ input that can be relied upon will further fair competition and minimize the possibility of undue liability increasing costs. Most importantly, it will ensure that consumers will not be harmed by unnecessary confusion.”

The groups also encouraged the CFPB to continue working with industry vendors, provide additional example forms and resolve inconsistencies with state laws on mortgage disclosures.

Read the letter.

Undercapitalized Credit Unions, June 30, 2014

As of June 30, 2014, there were 60 undercapitalized credit unions in the United States.

These undercapitalized credit unions held slightly more than $3.4 billion in assets.

Six credit unions were classified as critically undercapitalized, while 14 credit unions were significantly undercapitalized.

Four credit unions that were classified as undercapitalized had net worth ratios in excess of 6 percent. However, their net worth ratios did not meet the minimum risk-based net worth requirement.

Rep. Luetkemeyer Rips NCUA

Speaking at the National Association of Federal Credit Unions Congressional Caucus, Rep. Blaine Luetkemeyer (R - MO) ripped the National Credit Union Administration (NCUA) for requesting that the House Financial Services Committee reject any amendment related to the agency's risk-based capital proposal.

Luetkemeyer said: "Here’s a regulator petitioning us, Congress, not to do our job. I mean, it’s just beyond explanation. They don’t want any oversight. They don’t want anybody to interrupt their little games that they’re playing."

It seems that the relationship between some members of the House Financial Services Committee and NCUA's leadership may be a bit frosty.

See the story in Credit Union Times.

Bethpage FCU Buys Branch, Assets, and Liabilities from City National Bank of New Jersey

Newark, N.J.-based City National Bank of New Jersey is selling assets and liabilities of its Roosevelt, N.Y., branch to $5.7 billion Bethpage Federal Credit Union.

According to the FDIC, the branch in question had $15.3 million in deposits as of June 30, 2013. City National Bank on September 4 filed an application seeking approval for the proposed sale, which is expected to close by December.

Read the story in the American Banker.

Rep. Maloney: Overdraft Fees Should Be Reasonable and Proportional

Representative Carolyn B. Maloney (D-NY) wrote Consumer Financial Protection Bureau Director Richard Cordray requesting he act immediately to curb abusive overdraft fees.

She specifically urged Cordray to expand the opt-in rules to checks and ACH transactions and to require overdraft fees to be “reasonable and proportional.”

By advocating for overdraft fees be "reasonable and proportional," the Congresswoman is proposing price controls.

However, price controls interfere with the proper functioning of markets.

Capping overdraft fees would create perverse incentives. Individuals would be more likely to overdraw their accounts, while at the same time banks and credit unions would be less likely to offer the product.

In addition, a possible outcome from capping overdraft fees is that people who regularly overdraw their accounts may lose access to checking accounts and possibly to depository institutions.

While policymakers are looking for ways to increase financial inclusion, proposals to limit what banks and credit unions can charge on their products and services, such as requiring overdraft fees to be reasonable and proportional, will achieve the opposite outcome.

Read Representative Maloney's press release and letter.

College Students and Low-Income Designation

Numerous studies show that lifetime earnings and level of educational attainment are positively correlated.

However, there are some college and university credit unions, which have received a low-income designation from the National Credit Union Administration (NCUA).

According to NCUA's regulations, "[t]he term “low-income members” also includes those members enrolled as students in a college, university, high school, or vocational school."

In other words, NCUA does not consider the income of the member enrolled in college or university nor the financial wherewithal of the student's family. Also, NCUA does not take into consideration that upon graduating college students will on average see a significant increase in their earnings relative to the broader population.

For example, Georgetown University Alumni & Student Federal Credit Union has a low-income designation.

But a study by Payscale.com found that Georgetown graduates had a median starting salary of $55,000 and a median mid-career salary of $110,000, according to a November 2008 article in The Hoya. The survey only considered students without graduate degrees.

If the study had included students with graduate or professional degrees, the pay would have been significantly higher.

College students have greater economic mobility. It is a misnomer to call credit union members enrolled in college low-income members.

NCUA needs to reconsider treating members that are enrolled in college or universities as de facto low-income members.

Stat of the Day: 54 Percent of CUs Saw a Y-o-Y Decline in Membership

While credit union trade associations were spiking the ball celebrating that credit union membership had reached 100 million, most credit unions did not participate in this membership growth.

According to NCUA, the median credit union membership growth rate was minus 0.4 percent year-over-year. Nationally, 54 percent of credit unions had fewer members at the end of the second quarter than a year before.

NCUA noted that credit union industry membership growth was primarily due to large credit unions.

Radio Ad Calling for the End of CU Tax Subsidy

ABA is running a radio ad this week emphasizing the need to end the credit unions’ outdated tax subsidy.

“Government data show that just one percent of [credit union] home loans went to low-income borrowers,” ABA president and CEO Frank Keating says. “For that, credit unions avoided $2 billion in taxes. Ask Congress why taxpayers should give credit unions $2 billion for doing just one percent of their job.” Listen to the ad.

Louden Depot CU Closed

The Iowa Credit Union Division was granted authority by the District Court to place Louden Depot Community Credit Union of Fairfield, Iowa, into receivership and then tendered the receivership to the National Credit Union Administration.

Community 1st Credit Union of Ottumwa, Iowa, immediately assumed most of Louden Depot Community Credit Union’s members, assets, and loans.

The Iowa Credit Union Division made the decision to take over management of Louden Depot Community Credit Union and determined the credit union was insolvent with no prospect for restoring viable operations on its own. Financial irregularities probably contributed to the credit union's failure, as the credit union's most recent call report filing indicated that the credit union was well capitalized and profitable.

Louden Depot CU had almost $5 million in assets at the time of its closing.

Louden Depot Community Credit Union is the seventh federally insured credit union liquidation in 2014.

Read the press release.

Dane County CU Suspends Mortgage Originations

The Wisconsin State Journal is reporting that Dane County Credit Union suspended mortgage loan originations due to personnel issues.

It appears that the credit union did not have the right people in place to be up to speed with regard to the new mortgage rules.

Read the article.

PenFed's Motley Fool Visa Card Membership Scam

Pentagon Federal Credit Union (PenFed) is marketing a Motley Fool Platinum Cash Rewards Visa Card and at the same time making a mockery of the associational common bond requirement.

According to PenFed's membership application, the credit union will make a complimentary $5 deposit into a share account required for credit union membership; but will also make a donation to a group to qualify a person for credit union membership.

PENFED MEMBERSHIP
Credit Unions may only consider applications for account, loans, or services from their members. Through The Motley Fool, there is an easy way for you to join PenFed.

PenFed will provide you a complimentary $5 as an opening deposit into your share (savings) account which is required to be a PenFed member. PenFed will also make a one-time $15 donation on your behalf to one of its partner organizations, Voices for America's Troops (VOICES). This donation will make you a member of VOICES, which then entitles you to become a member of PenFed.

However, if a person is unwilling to pay the associational dues, this would suggest a lack of support for the association’s goals and mission.

Moreover, PenFed states on its appplication that renewal of VOICES membership is not required to remain a member of PenFed.  Once again, this suggests a lack of commitment to the goals and mission of VOICES.

I'm also troubled by the PenFed's depositing $5 into a share account for the individual that is required for credit union membership.

So, it appears that the linkage between the borrower and saver being the same is no longer satisfied, when a credit union pays the deposit required for credit union membership.

These continued common bond abuses by large credit unions, which operate like mutual savings banks, will ultimately jeopardize the tax exemption for credit unions.

Click on the Application.

Corporate Inversions Resemble CU Tax Exemption

Corporate tax inversions like Burger King’s and Medtronic’s -- in which U.S. companies incorporate offshore to avoid some U.S. taxes -- are much in the news and attracting policymakers’ attention. So why, ABA President and CEO Frank Keating asked in an American Banker op-ed yesterday, have policymakers paid so little attention to credit unions, “an entire industry that has been quietly -- and legally -- avoiding taxes for eight decades?”

“In fact, credit unions' tax loophole costs taxpayers as much as inversions do: $2 billion per year,” Keating wrote. “If inversions are controversial, so too should be the subversion of the historic basis for credit union tax exemptions.”

The brouhaha over inversions highlights the need for comprehensive, pro-competitive corporate tax reform, he argued -- which should close loopholes for credit unions. “Companies should be free to grow their businesses on their own terms, and they should then pay straightforward taxes on their profits,” he said.

Read the op-ed.

Loans and Assets Up in Q2 2014

NCUA reported that credit union loans and assets rose during the second quarter of 2014; but shares (deposits) fell.

Federally insured credit unions’ total assets grew $47.3 billion, or 4.5 percent, from the second quarter of 2013, to rise above $1.1 trillion for the first time.

Federally-insured credit unions reported that in the second quarter of 2014, outstanding loan balances rose 9.8 percent from the second quarter of 2013 to $673.9 billion, the highest year-over-year growth rate since the first quarter of 2006.

All major loan categories grew in the second quarter led by strong auto lending. New and used car loan balances were up year-over-year by 17 percent and 11.6 percent, respectively. Business loans at credit unions were $48.8 billion at the end of the second quarter -- up 12 percent from a year ago.

Overall, share and deposit accounts declined slightly from the first quarter to $940.4 billion, but were 3.4 percent higher than the $909.5 billion at the end of the second quarter of 2013.

The growth in loans combined with the contraction in deposits caused the loan to deposit ratio to increase to 71.7 percent, the highest ratio since the fourth quarter of 2010.

Net income in the quarter ending June 30 was $2.3 billion, up 2.9 percent from a year earlier. Return on average assets rose by 3 basis points between the first and second quarter to 81 basis points; but was 3 basis points below last June's return on average assets.

Factors contributing to higher net income were increases in both interest and non-interest income. Higher expenses in the second quarter of 2014 negatively impacted net income.

The net worth ratio of federally-insured credit unions rose 16 basis points during the second quarter to 10.77 percent. Ninety-seven percent of all credit unions are well-capitalized with a net worth ratio of at least 7 percent. Five credit unions were critically undercapitalized as of June 2014.

There was a slight uptick in the delinquency ratio during the second quarter. The delinquency ratio of 0.85 percent was up 4 basis points from the previous quarter but was still 19 basis points below the delinquency ratio in the second quarter of 2013. The net charge-off ratio was 49 annualized basis points, down from 50 basis points in the previous quarter and down from 58 basis points a year earlier.

NCUA continued to express concern about interest rate risk as the industry’s net long-term asset ratio remained high at 35.4 percent.

Read the press release.

Financial summary one-pager.