NCUA Oversteps its Bounds

July 29, 2015

Hubris is defined, briefly, as wanton insolence or arrogance. It is certainly an appropriate description of action taken recently by the board of the National Credit Union Association (NCUA), as it tries to do by regulation what Congress has opted not to do by legislation. This affront of the checks and balances built into our system of government boils down to legislation by regulatory fiat. George Washington would spin in his grave at what our governmental bureaucracy has evolved into over the past 240 years. Worse, the NCUA action is indicative of what we have been seeing the past 10 years or so … it is not an anomaly.

What the NCUA has done, essentially, is to gut the credit union member business lending caps that were clearly established by legislation in Credit Union Membership Access Act of 1998, which primarily allowed credit unions to accept multiple groups as part of their membership, thus effectively eliminating the historical requirement of a common bond of members of a credit union. The legislation set the member business lending cap at 1.75 times the credit union’s net worth, or at 12.25 percent of the credit union’s total assets. Business loans under $50,000 were exempt from this calculation, as were any portion of loans with government guarantees, such as Small Business Administration loans.

The banking industry fought hard back in 1998 to defeat the act, but it passed with little opposition in Congress. Since then, the banking industry has singularly cried foul to Congress, and the issue has not been taken up again. However, each year there are bills introduced to increase or eliminate the member business lending cap available to credit unions. The frustrating part about the NCUA decision to wade into this issue is the sheer gall of collectively thumbing their noses at Congress, which has historically set the laws for how banks and credit unions must operate. Regulators ‒ such as the NCUA, Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. ‒ enforce the laws; they do not establish laws. NCUA apparently has determined that it does not need permission from Congress.

I have been involved in countless conversations with banking regulators at all levels, and I can assure you that other regulators do not share this philosophy. Time and time again, when we have asked for some form of relief from a regulation, regulators have said that we need to go to Congress, because all they can do is follow Congress’s will. In other words, regulators are simply doing what they believe Congress gave them authority to do. Clearly the NCUA does not ascribe to that logic. The NCUA has become an industry advocate, rather than a regulator tasked with the safety and soundness of the institutions they regulate, let alone any consumer protection concerns.

I believe that Congress eventually would have lifted or eliminated the member business lending limit, but there would have been a big price for it. That price would likely have been total or partial elimination of the federal tax exemption that credit unions continue to enjoy. However, there was no mention of the federal tax exemption in the proposed rule from the NCUA.

It is way past time for banks and credit unions to be put on level playing fields for product offerings, taxation, access to capital and regulation. And it is high time that regulators stay within their realm by regulating laws passed by Congress, rather than by creating law through regulation.

 – S. Joe DeHaven

Sharing Stories to Be Persuasive

July 22, 2015

Last week I had the privilege to attend the American Bankers Association summer leadership meeting in Baltimore. One of the speakers was Colonel Arthur J. Athens, USMC (retired), director of the U.S. Naval Academy’s Stockdale Center for Ethical Leadership in Annapolis, Maryland. Col. Athens reminded us of the lessons of the great Greek philosopher Aristotle, who determined that persuasion is based on three components: ethos, logos and pathos. Ethos is the ethical appeal, or credibility, of the argument. In today’s environment, reputation would have a great deal to do with whether the argument can be believed. Next, logos is the logical deduction, or reasoning, of the argument. Logos is bolstered with statistics, data and documentation. Finally, pathos is the emotional means of persuasion. Modern-day advertising, with its heavy emotional appeal, is based on pathos.

Combining these various types of persuasion to make a point is best done through the telling of a story. By rights, bankers should be quite persuasive. Bankers have ethos, because within communities, bankers as individuals are held up as people of character and credibility, even if the industry as a whole is not held in high esteem. Additionally bankers have logos. They have innately logical demeanors ‒ after all, the books have to balance ‒ so bankers score “through the roof” on logos and can provide clear, logical arguments. The persuasive area where bankers may fall short is the emotional side of reasoning: pathos. This is where storytelling can be especially important in connecting emotionally with clients and associates.

An example of how these three elements of argumentation may play out for bankers is when trying to persuade a congressman to support a certain piece of legislation. First, ethos or credibility should already be in place, because the congressman should already know who the banker is ‒ underscoring the value of grassroots advocacy. Second, the banker likely has the logos, or logical, part of the argument covered and can back up assertions with numerical proof. However it is in the third area, pathos, where the banking industry needs to step up. Do banking professionals consistently connect with congressmen regarding how industry issues affect their voter constituencies? Do bankers connect as well and as often as the credit union leaders, or consumer activists, or retailers?

How can the banking community do a better job of being persuasive? Though there are many answers, one way is to become better at storytelling. When you are talking to your congressmen about how bad the regulatory environment has become, tell specifically about your client who no longer qualifies for a mortgage at your bank, and the negative effect on that client. To get a loan, did your client have go to a loan broker or a payday lender … and consequently have to pay a much higher rate of interest?

Or can you tell a story about a customer who appreciated your bank’s overdraft protection program so much that the customer wrote you a thank you note? Your team regularly hears from customers who appreciate the service your bank supplies, and those are stories worth sharing. If the banking community is going to win some of the larger battles looming in Washington, D.C., we have to get better at telling our story. It is the story of customers and communities. It is ever unfolding and changes with the times. Col. Athens says that he practices telling his stories in front of a mirror, or tries them out on family or friends. We must become that dedicated to telling our stories of banking.

– S. Joe DeHaven

Time to Tailor our Regulatory Regime

July 15, 2015

Since the first of the year, I have written and spoken frequently about what I see as a change in attitude toward the banking business, particularly toward the community banking sector, by both the prudential regulators and Congress. Since progress moves slowly in Washington, D.C., I am certain that many bankers question my optimism. Recently, however, a couple of positive developments took place that support my belief that the tide has begun to turn.

Last month Republican Rep. Scott Tipton from Colorado introduced the TAILOR Act* bill. This common sense bill simply states that “the Federal financial institutions regulatory agencies shall (1) take into consideration the risk profile and business models of the various institutions or classes of institutions subject to the regulatory action; (2) determine the necessity, appropriateness, and impact of applying such regulatory action to such institutions or classes of institutions; and (3) tailor such regulatory action applicable to such institutions or class of institutions in a manner that limits the regulatory compliance impact, cost, liability risk, and other burdens as is appropriate for the risk profile and business model involved.”

Couple that bill with a speech titled “Dodd-Frank at Five; Looking Back and Looking Ahead,” delivered last week by Federal Reserve Gov. Lael Brainard before the Bipartisan Policy Center. Brainard said: “One thing we can all agree (on) is that we have a more resilient and dynamic financial system as a result of having a very large number of banking organizations, in different size classes, pursuing different business models. Indeed, that diversity is one of the hallmarks of the U.S. system, which distinguishes it from many other advanced economies. Accordingly, we want to make sure that our regulatory framework supports banks in the middle of the size spectrum, as well as community banks, and the customers they serve. Thus, by the same rationale that argues for the greater stringency of the standards associated with greater systemic risk at the top end of the scale and complexity spectrum, we will carefully examine opportunities to ease burdens at the lower end of the spectrum. And we will want to continue to refine our regulatory standards, using the authorities under Dodd-Frank to make sure they are tailored to be commensurate with the risk to the system.”

My interpretation is that Gov. Brainard is indicating that tailoring regulation to the size and complexity of the individual financial institution is something that the regulatory community must embrace to assure that the localized financial structure ‒ unique to the United States, the most successful and powerful economy ever on earth ‒ will be protected for future generations. At the same time, Congressman Tipton’s bill provides a legislative remedy if the regulators do not tailor regulation to the size and complexity of the individual institutions or classes of institutions.

The banking industry must remain vigilant in its efforts to continue to press both regulators and Congress for common sense relief from the oppressive regulatory burden that has been unleashed by the Dodd-Frank Act. I assure you that the Indiana Bankers Association, along with our affiliate state associations, the American Bankers Association and the Independent Community Bankers of America, will continue to pursue a tailored regulatory regime.

* Taking Account of Institutions with Low Operation Risk Act

-S. Joe DeHaven

Summertime Advocacy, With a Look at Foreclosures

July 8, 2015

Guest blog by Amber R. Van Til, IBA Executive Vice President

During the “downtime” summer months, a great deal of advocacy takes place in preparation for the upcoming legislative Session. There are regional meetings, action alerts, summer study committees, fundraisers and events such as Blue Jeans for BANKPAC Day. Also this summer, the IBA Government Relations Team is continuing to explore the topic of foreclosure. There are no easy answers to this difficult issue, and certainly much is at stake. For a homeowner, foreclosure is financially and emotionally devastating, often following a series of setbacks. For the community, foreclosure means neighborhood vulnerability and compromised market value. For the lending bank, foreclosure signals certain loss ‒ a last result pursued only after exhausting all other options.

In Indiana there is some encouraging news with respect to the foreclosure situation. The frequency of foreclosures has been steadily decreasing, after peaking following the financial crisis of 2008. Also bear in mind that, even at the worst of times, Indiana was spared the dramatic housing scenarios experienced elsewhere in the nation, due to relatively stable housing prices. Indeed most Hoosier foreclosures have been attributed to job loss, not market volatility. Yet while looking at trends from a distance, let us remain sensitive to the reality that for the families, communities and financial institutions directly affected, each and every foreclosure is one too many. Let us also remember that the length of the foreclosure process in Indiana is one of the longest in the country. RealtyTrac reports an average foreclosure process of 601 days for Indiana, ranking our foreclosure period as the eighth longest in the United States.

This unwieldly foreclosure process has resulted in an abandoned housing problem, to the risk of the community at large. To address foreclosure concerns, the Indiana Bankers Association has been meeting regularly with several interested parties – including the Indiana Credit Union League, the Indiana Mortgage Bankers Association, consumer groups, nonprofit service organizations and legislators ‒ to review the process and consider ways to streamline it. At one point during the 2015 Session, the banking community was hopeful that an Indiana settlement conference provision would remain in SB 415, the Vacant and Abandoned Housing bill. The provision had addressed the duplicative requirements in the Dodd-Frank Act and Indiana Code regarding settlement conferences. Unfortunately, however, the provision proved too complicated to examine at length during the rush of the Session and was removed before the bill passed. Though the IBA was supportive of removing the provision, as it had not been thoroughly vetted and understood, its removal is testament to the challenges of foreclosure reform.

Throughout this summer and in upcoming months, your GR Team will continue to meet with interested parties to seek a positive resolution to the foreclosure issue. While we are grateful that the rate of foreclosures in our state is decreasing, we are eager to see the process amended, for the benefit of all.

Banking Good-News Stories

July 1, 2015

Guest blog by Laura Wilson, IBA Vice President-Communications

First the bad news, and no shortage of it: Our world is awash in crime, corruption, brutality and despair. Recent reports ‒ a chilling church-place slaughter, synchronized acts of terrorism abroad, and now the financial meltdown of Greece, possibly to be followed by Puerto Rico ‒ make it hard to see what is right in this world. Yet we know deep down that much is right and well, and that most people are honest and well-meaning. We simply need to be reminded now and then.

Now for the good news: For every disaster imaginable, there are caring people who line up to help. As the late Mr. Fred Rogers said, “When I was a boy and I would see scary things in the news, my mother would say to me, ‘Look for the helpers. You will always find people who are helping.’” Here in the Indiana banking community, we see plenty of people who help, ranging from community volunteers at all levels to the bankers who support their efforts. For me personally, I have been extra privileged to enjoy a close-up view by interviewing banking leaders for Hoosier Banker magazine. These bankers all have distinct backgrounds and histories, yet are connected by the commonalities of high leadership skills, impeccable integrity and respect for those who preceded them. Modest about themselves, they are quick to share stories about the good deeds of their predecessors.

There is the story that Andrew Briggs, Bank of Geneva, shares about his banking grandfather, whose sterling reputation helped stave off customer panic among the bank’s customers during the Great Depression. “He was a touchstone for calming people’s fears,” explains Andrew of his grandfather. “Because he was well-known and respected, everybody knew that Bank of Geneva was in great shape.” Thus there was never a run on the bank.

Another Depression-era story is the one that Mike Schrage, Centier Bank, northern Indiana, tells of his great-grandfather. During the Depression, the late Henry Schrage put his entire estate into trust as a loan provision to ensure the bank’s survival. “His own family members could not access his estate for 10 years after he died,” recalls Mike. “He wanted to make sure the bank made it through the Depression. My great-grandfather did it to save the bank.”

These stories are particularly relevant as we read about the week-long bank closures in Greece, accompanied by daily limits to ATM withdrawals and a shutdown of stock-and-bond trading, to try to avert a run on banks. This desperation may seem unimaginable in the stable Midwest, but we have faced financial crisis, too. Working in our favor has been a fundamentally sound banking system, powered by altruistic leaders determined to save their banks and better their communities.

What are your banking stories? We will be reaching out to members of the Indiana Bankers Association in coming months, as Hoosier Banker celebrates its 100th anniversary in 2016. Coincidentally next year, the state of Indiana marks its 200th birthday. IBA is working on appropriate commemoration for both events, with details forthcoming. Meantime please be on the lookout for moments of particular pride in your bank history ‒ weathering financial storms, outsmarting would-be robbers, keeping your towns and communities vibrant and healthy. With so much bad news in this world, we are eager to share your good news.

Credit Unions Should Play by the Same Rules as Banks

June 24, 2015

Like many sports fans, I spent some time this past weekend watching the best golfers in the world tackle the U.S. Open at Chambers Bay, near Tacoma, Washington. This Pacific Northwest course proved to be extremely difficult, even for world-class golfers, with its undulating greens, massive dunes and coastal winds. The course is so challenging that it’s almost unfair to the competing golfers. Yet all of the contestants have to play the same 18 holes each day, and all must perform within the same boundary of rules. That context makes the tournament fair, even if it is difficult.

While this theory of fairness seems obvious, imagine if half of the golfers were permitted to play by a different set of rules that were significantly less burdensome. No one would believe that arrangement to be fair, and no one would take seriously the winner of such a rigged system. Unequal rules defy what we deem to be just and fair. After all, whether in the arena of sports, games or business, the rules are the rules, right?

Not always. In the financial services world, commercial banks, which make up about half of the deposit-gathering financial services business, operate in an environment in which they are burdened with much more regulation than ‒ and even have a profit disadvantage against ‒ one of their main competitors: credit unions.

Credit unions are allowed to provide the same financial services that commercial banks provide, but they are not required to comply with Community Reinvestment Act regulations, they do not pay any federal taxes and, in most states, they do not pay state taxes. Commercial banks, by contrast, must comply with myriad regulations in addition to CRA requirements. Commercial banks also pay federal and state taxes in support of this great country. How is this disparity possible? It is because when credit unions were first chartered through the Federal Credit Union Act of 1934, they shared a common bond. Back then, each credit union primarily served a single employer, and nearly all credit union members were blue collar workers. Those early credit unions were founded on the premise that they were to make credit available to people of modest means, for which service they were given a tax exemption.

Fast forward to today, and we find a radically different credit union industry. Today over 200 credit unions hold more than $1 billion in assets, making them larger than 90 percent of taxpaying banks. Very few credit unions continue to abide by the traditional common bond rules ‒ many have become “community” credit unions, which purport to serve a designated geographic area. Meanwhile the National Credit Union Administration, the compliant regulator of the industry, continues to stretch this common bond definition beyond recognition. As to serving people of modest means, that too has changed. Today’s credit union industry, in numerous surveys conducted by independent organization, including the U.S. Government Accountability Office, have an average customer base that is more affluent than that of commercial banks.

Although it seems nonsensical, credit unions today have the power to make commercial loans, not just loans to persons of modest means. They are limited in the amount of commercial loans that they can make, but are lobbying Congress hard to get that amount increased. I believe that credit unions should have the same powers that commercial banks have, but only if they uphold the same responsibilities as commercial banks. Just as the U.S. Open golfers must all play by the same rules, it is time for credit unions to play by the same rules as commercial banks ‒ by paying federal and state taxes, and by complying with the same regulations.

– S. Joe DeHaven

TRUPS: Déjà Vu All Over Again

June 17, 2015

It was that great philosopher of our time, Yogi Berra, who coined the saying, “It’s déjà vu all over again.” That quip came to mind recently when I learned that the Basel III capital standards strongly encourage the divestiture of any trust preferred securities (TRUPS) owned by a bank. The déjà vu part is that the banking industry fought this very issue in late 2013 and early 2014, when it was part of the implementation of the Volcker Rule under the Dodd-Frank Act. Then, as now, the rules would prohibit ownership of TRUPS through regulation.

In 2013, just days before Christmas, the bank regulatory agencies came out with a ruling stating that banks should divest themselves of TRUPS by the end of the year. These securities were held mostly by community banks throughout the country. Indiana banks held tens of millions of dollars of TRUPS, and those banks were being advised to dispose of them. The obvious problem was that the market was still depressed as a result of the financial crisis and, with nearly a billion dollars hitting the market all at once, the price would be further depressed. In an odd twist of fate, TRUPS were just beginning to recover from the financial crisis, and the banks that owned them were seeing interest payments pick up. As a result, the American Bankers Association filed a lawsuit against the regulators, many Congressmen signed letters requesting that regulators back away from this ruling which primarily harmed community banks, and bankers themselves sent letters and emails and made urgent telephone calls to regulators and Congressmen. Bear in mind, all of this occurred within 10 days of Christmas. The result in mid-January was that the regulators modified their ruling to provide a carve out for most of the TRUPS. However, on a going-forward basis, banks are not permitted to invest in TRUPS.

The banking industry had won ‒ or so we thought. Along comes this recent interpretation of the Basel III rules by the regulators. The rules are not intended for community banks, but the new interpretation winds up harming them. Furthermore, such a ruling makes less sense today than it did a year and a half ago, because no more TRUPS can be purchased, and the quality of the remaining TRUPS market is much higher.

Once again we will have to ask the regulators to apply some common sense to the new ruling. If they do not respond in a timely fashion, we will put forth a lobbying campaign and perhaps consider another suit. It is hard to believe that the regulators would want to face this situation again. Basel III should never be applied to community banks, since it is designed to cover international transactions. However, this provision specifically should be dealt with immediately to provide community banks with the chance to wind down their exposure to TRUPS in a timely manner.

Let’s hope that the regulators do the right thing, but if they do not, let’s be prepared to mount an all-out offensive to remedy this situation. At least this time we can deal with this issue well in advance of December. It may be déjà vu all over again, but at least we can avoid ruining another Christmas!

– S. Joe DeHaven


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