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


Success Is Determined by Our Ability to Adapt

June 10, 2015

Recently my father moved into an assisted living facility. He came to the realization that he could not live independently much longer. He is mentally acute, but struggles to walk without the assistance of a walker or cane. While it is frustrating for a man who has always been strong and independent, he managed to set those feelings aside and do what needed to be done. I am very proud of him for making this courageous move.

The different stages of life require many changes. Success is determined by how well we adapt to those changes. In this way, businesses are much like people. They, too, have life stages that require adaptation. How businesses navigate through necessary changes determines their success and often their survival. Over the past 10 years, the business of commercial banking has undergone changes that no banker would have anticipated. Through it all, the vast majority of the banking community has survived. To those who successfully weathered the storm, I say “congratulations!” That is truly a testament to your management, business plan and likely conservative practices.

What is the next stage for the business of banking? If we are honest, we are all hypothesizing, but let me tell you what I think will be the next stage. I believe interest rates will rise, which will cause all bankers to manage their balance sheets differently. Most bankers have already anticipated this and have adjusted their investment portfolios accordingly. Quality commercial loan demand should continue to improve, as more certainty appears to be in the economy than we have seen in a very long time. Questions remain regarding tax reform and health care costs, but the economy continues its slow growth, and businesses are taking notice. They have been sitting on significant amounts of cash for quite a while, and they are now beginning to invest some of it in growth. Hopefully that will convert to higher-paying jobs, which will further boost the economy.

Technology is going to continue to move forward at warp speed. Robotics continue to replace menial tasks in every area of business. Banking, insurance and health care may be the last to see significant changes, but they are coming. Much of what we do is filling out forms, which should be easily adaptable to robotics. Who knows what the next delivery system will be?

I continue to hope that the regulators will sustain some period of reasonableness. But just when I think it will begin, somewhere a decision is made that is contrary to the best interests of bank customers. Many of those decisions seem to continue to come from the Consumer Financial Protection Bureau. They must be reined in. Additionally there are mixed signals from the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. One quote appears to set the stage for some calmness, and then the next makes it appear that they are getting ready to pile on more burden. It has become very difficult to anticipate what a regulator will command.

Lastly is Congress. I sense that there is a bipartisan awareness that the pendulum has swung too far, and that banks are being smothered with needless and senseless regulation. Congress never acts quickly, but I believe over the next several years it will eliminate some of the overkill it cast upon the banking business and its customers. If this is to happen, it will require the efforts of bankers being very active in their grassroots efforts with elected officials.

Just as my father is making the adjustments necessary to his life, it is incumbent on bankers to continue to make adjustments in order to survive. I am confident that bankers will succeed. The bankers who have guided their organizations through the past 10 years are the best of the best, and they will guide their organizations through the coming changes.

-S. Joe DeHaven


DC Is Not as Partisan as Portrayed

June 3, 2015

Last week I reported on a regulatory relief bill that the U.S. Senate Committee on Banking, Housing & Urban Affairs passed on May 21. The bill, introduced by Chairman Richard Shelby of Alabama, was passed along party lines, with Republicans in favor. I also reported that the bill included two amendments, also approved along party lines, with the notable exception of Indiana Democrat Sen. Joe Donnelly, who voted in favor of the amendments.

Sen. Donnelly is considered to be one of four moderate Democrat senators serving on the Senate Banking Committee. It has been widely reported that any real chance for passage of a regulatory relief bill is going to need bipartisan support. This support starts at the committee level, and Sen. Donnelly was well-positioned to play a crucial role in providing that initial bipartisan support.

I recently had the opportunity to thank the senator for his bipartisan support of the two amendments he supported as the only Democrat vote. I also shared with him that I thought he would be in support of many of the other regulatory relief provisions of the Shelby bill that was approved by the Committee. He assured me that there were provisions in the bill that he could support, though he did express concern about other provisions, which he did not view as appropriate for this bill. He also indicated that members of both parties of the Senate continue to meet to work through the differences between the two regulatory relief proposals. Donnelly seemed confident that a compromise bill would come out of this process.

In the past few days, the financial press has been focused on a perceived Republican strategy that has regulatory relief being placed in must-pass, budget-related bills. Apparently this thinking comes from a speech by Chairman Shelby in late April at the Independent Community Bankers of America legislative policy summit, which I attended. As I recall the speech, the context was more of a fallback position that could be explored. I am immediately drawn to Sen. Donnelly’s belief that a compromise bill would come out of this process and pass the Senate.

While this is politics above my pay grade, it seems to me that if a bill can be developed that has bipartisan support and is primarily helpful to banks, it would find its way to the Senate floor and be approved by the entire body. It would show that bipartisan work can be done by what the voting public believes to be a partisan body. I would also like to think that Sen. Donnelly will be at the forefront of any Democratic support from his caucus.

Regardless of how this plays out, Sen. Donnelly wants to see a bill with regulatory relief move this year. We certainly hope he is right and will do all we can to help him and his colleagues in their quest. This could come down to how much support the compromise bill gets from community bankers. If that is the case, I know that a regulatory relief bill would get a full court press for grassroots support. Thank you, Sen. Donnelly, for your candor and support of community banking!

-S. Joe DeHaven


Bipartisan Progress

May 27, 2015

Last Thursday was a monumental day for the banking industry. It marked the first time in nearly five years that the U.S. Senate Committee on Banking, Housing & Urban Affairs passed a bill out of committee that directly impacts the business of banking. Not since the regretful passing of the Dodd-Frank Act has the Senate Banking Committee passed any bill of significance regarding commercial banking. Fortunately last week’s 212-page bill, drafted by Committee Chairman Richard Shelby of Alabama, provides much-needed regulatory relief to community and regional banks. The bill passed 12-10 along party lines, with all Republicans voting for it. The Democrat caucus on the Banking Committee, led by Sherrod Brown of Ohio, decried the bill as being the wish list of the banking industry and consequently offered an alternative that covered three issues favorable to community bankers, which was defeated.

The Democrat bill version provided community banks with:

  1. Portfolio lending automatic qualifying as a qualified mortgage for banks under $10 billion in assets (the Republican version did not set a cap);
  2. Not requiring privacy notices when there has been no change in privacy policy;
  3. Extending from 12 to 18 months the examination cycle for well-capitalized banks under $10 billion in assets.

In addition to the above three provisions, the passed Republican version included the following of help to community banks:

  1. Broadens the rural definition of the Consumer Financial Protection Bureau (CFPB) for both escrow accounts and appraisals;
  2. Creates an independent ombudsman to appeal disputes to;
  3. Exempts future payments of insurance escrows from the computation of mortgage points and fees;
  4. Adds inflation adjustments to Dodd-Frank Act thresholds;
  5. Exempts banks with less than $10 billion in assets from the Volcker Rule;
  6. Allows for short form call reports for community banks;
  7. Requires budget transparency of the National Credit Union Association.
  8. Trumps the Federal Housing Finance Authority as to membership in Federal Home Loan Banks;
  9. Provides for EGRPRA1 review of rules resulting from the Dodd-Frank Act;
  10. Provides for a sense in Congress toward tailored regulation to size and complexity of financial institutions;
  11. Requires a study of mortgage servicing assets under Basel III;
  12. Creates TILA/RESPA2 compliance safe harbor until CFPB certifies compliance with all state laws; also allows HOEPA3 loan rate to be lowered within three days of closing without triggering new disclosures.

There were a few other changes that primarily benefit larger banks. There were also two amendments that passed the committee, both by a vote of 13-9, as Indiana Democratic Sen. Joe Donnelly joined the Republicans to vote in favor. One amendment would increase from $10 billion level to $50 billion the level for examination by the CFPB. The other would bar all banking regulators from participating in the U.S. Department of Justice’s Operation Choke Point.

While we struggle to understand opposition to the common sense issues above, we very much appreciate Sen. Donnelly for breaking party rank in order to vote for these two amendments. We certainly hope that his courageous integrity will open the door to others to overlook party lines in order to support the community banks that serve their customers and communities.

The other ray of hope is that, following the voting, both Sen. Shelby and Sen. Brown indicated that the passage of this bill out of committee represents a first step, and that they would continue to work together to find common ground to help community and regional banks. The Indiana Bankers Association certainly welcomes that bipartisan progress!

1 The Economic Growth and Regulatory Paperwork Reduction Act of 1996
2 Truth in Lending Act / Real Estate Settlement Procedures Act
3 The Home Ownership and Equity Protection Act

– S. Joe DeHaven

 


Moving Momentum Into the Right Direction

May 20, 2015

Momentum. Momentum is the word we use to describe that unknown impetus driving thought or action in a certain direction. It can be either good or bad direction, or sometimes both. Currently the banking business appears to have plenty of momentum driving it in a good direction. As I speak with bankers across Indiana and throughout the nation, I am regularly told that they are seeing an increase in high-quality loan demand ‒ more than they have seen in quite a while. That is a very good direction.

The Federal Reserve Open Market Committee, which sets interest rates, seems to be prepared to soon increase those rates, allowing banks to increase the interest margin between loans and deposits, and thus helping improve net earnings. Even Congress appears to be moving some legislation that would provide much-needed regulatory relief. The recently concluded session of the Indiana General Assembly passed a few bills that will help banks operate more efficiently in Indiana.

Last week the Indiana Bankers Association hosted its annual Mega Conference, an intense two-day educational program covering many disciplines of banking in nearly 50 sessions. Speakers and bankers were more positive about the future than they have been in several years. This conference is an effective barometer, because it attracts directors and officers from all levels of their banks, and those banks are of all sizes and geographic locations. In other words, Mega this year provided a representative cross section of 1,276 attendees who are either bankers, or purveyors of bank products and services.

Momentum is funny, though. It can change quickly, or it may slog along for years and years. No one person or group of people can make momentum continue or stop, but an event or a widespread shift in group opinion can change it in a day. We can facilitate desirable momentum by maintaining a positive attitude about those factors that are driving it. Another way to move that needle is through grassroots efforts. For example, invite a U.S. Congressman, state representative or state senator to your bank to show firsthand the regulatory burden involved in making a loan or opening a new account. Maintain that legislative relationship by providing input on issues you care about and are expert in. A simple email, postcard, letter or tweet from a constituent can go a long way toward influencing how our elected officials vote.

Obviously, there also are momentum changers that we have no control over. The recent financial crisis that tarnished banker reputations, sent numerous banks into default, and cost many consumers their jobs and homes is a sad example of how quickly momentum can change. We should never lose sight of the lessons learned during this damaging episode of our history.

Please continue to press the current positive momentum forward. Let us unite our efforts behind that which is in our control. We must continue to move forward in the right direction, so that our communities, customers, staffs and shareholders are fairly and comprehensively served. We have had enough bad momentum in recent years, so let’s work to sustain the present positive direction for years to come!

– S. Joe DeHaven


Mega Momentum

May 13, 2015

This week the Indiana Bankers Association is hosting its annual Mega Conference. Over 1,270 people have registered to participate in this unique event. The IBA created this primarily educational venue in 1993, and it has grown significantly over the past 23 years. This year the event has filled a record 92 booth spaces in the exhibit hall. It is the largest event hosted by a single state bank trade association held in the country. A dozen educational tracks will be held over the two-day educational portion of the conference.

IBA is proud to provide this offering to our member bankers. Most of our banks are community banks, and attendance at Mega represents an opportunity for educational exposure of various levels of management within those institutions. It also provides the chance to visit with those service providers who support the event through purchased booth spaces. It is a rare occasion for both line-level supervisors, in need of a solution, and the individuals who make the buying decisions to jointly observe alternatives.

In today’s fast-paced and overregulated world of banking, the IBA Mega Conference presents an opportunity for bank directors and officers together to learn about changes on the horizon or about new approaches to old problems. It is a cost-effective and efficient way for those smaller banks, in particular, to be exposed to multiple solutions. Our member bankers who attend this event consistently rate it extremely high, year in and year out.

The directors, officer and staff of the IBA take pride in this annual event. Over 100 Indiana banks are represented this year. Many attendees will use the information garnered to cross-train those who were not able to come. Many will use the opportunities gleaned from the exhibit hall to follow up with those companies that offer needed products or services. For years, our valued members have been telling us how important this conference is to them, and it’s truly satisfying to the IBA staff to meet the needs of those we serve. We host some 200 seminars and schools throughout the year and provide about 400 webinars annually, and we carefully survey attendees for feedback on each of these events. It is important that we offer relevant information in a timely manner.

While the regulatory burden thrust upon banks is overwhelming, IBA is pleased to provide a service that is necessary in order for our members to continue to serve their customers and communities. While it is unfortunate that so much of what we provide is compliance-related training, we are grateful to be able to provide it.

As we celebrate IBA’s entrepreneurship in creating this event, we are ever mindful that it is our members ‒ our customers ‒ who are the reason we exist, and we continually seek new and better ways to serve our members. Thank you to all of our member bankers and service providers who are giving momentum to this year’s IBA Mega Conference!

– S. Joe DeHaven

 


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