Wednesday, July 27, 2016

The federal government is making it impossible to be small

Bank Lawyer's Blog
July 24, 2016

Credit Unions and Community Banks Both Face "Shrinkage"

In his recent email newsletter (email for a subscription), credit union consultant Marvin Umholtz discusses the fact that credit unions face the same problem of "shrinkage" that we have discussed on this blog for some time with respect to the community banking industry. Not surprisingly, both segments of the financial services industry suffer from the same disease: crushing regulation.

On July 8th the Editor In Chief for the Credit Union Journal, Lisa Freeman, launched an initiative exploring reader attitudes about the serious question of whether 74% of the credit union industry is "too small to survive"­its-too-small-to-survive-1026267-i.html. The massive regulatory burden, much of it sourced by the federal government, had been identified as the primary culprit. There are other reasons why credit unions merge or liquidate, however, the burgeoning compliance burden stands out.

According to the NCUA's statistics on March 31, 2016, the number of federally insured credit unions dropped below 6,000 for the first time in history. This correspondent believes that by 2021 there will be fewer than 600 federally insured credit unions - and they all will be multi-billions in assets because they will have to be large enough to cope with the Dodd-Frank Acts and the FFIEC's compliance-driven culture that it is now too late to stop. An advancing avalanche of costly and complex rules are already in the federal pipeline. Among the next to hit will be the Military Lending Act Rule on October 3, 2016, that will upend the way consumer loans are granted.

Just by itself, the rogue CFPB has been a rulemaking nightmare. In a July 13th letter to the Office of Management and Budget's Office of Information and Regulatory Affairs (OIRA), the American Bankers Association (ABA) and the Consumer Bankers Association (CBA) urged OIRA to reform the "generic clearance process" in federal rulemaking so that the CFPB doesn't end-run procedures to make policy without having to follow the rules. The CFPB intended to use this stealth approach to making policy-related data collections for overdraft rules /commentletters/Documents/cl-PRA-ConsumerEngage2016.pdf.

The CFPB also plans to add 37 new data collection fields for the Home Mortgage Disclosure Act (HMDA) data reporting by mortgage loan originating financial institutions. The CFPB and the other FFIEC-member agencies, including the NCUA, are expected to double-down on fair lending compliance; and the disputed and controversial disparate impact theory has been terribly abused by the CFPB, the Housing and Urban Development Department (HUD) and by the Department of Justice (DOJ) in recent years HTTP://­challenge-huds-disparate-impact-rule.

The credit unions should not expect any relief from the CFPB's oppressive rulemaking. Regardless of which political party wins the White House, credit unions will not receive exemptions from the CFPB's rules. Exemptions by charter or asset size are incompatible with the DNA of the agency.

The U.S. Treasury's FinCEN has demonstrated its ever-expanding expectations for cybersecurity, as well as for the PATRIOT Act, the Bank Secrecy Act, and for the anti-money laundering compliance. The U.S. Treasury and its FinCEN unit are determined to cut off terrorist financing, and that would for the closing off of the weakest links - including smaller credit unions. The U.S. Treasury Department wants fewer open doors in which cybercriminals and terrorist bad actors might enter and deploy the U.S financial system.

The Financial Accounting Standards Board's current expected credit losses methodology (CECL) will be phased in over several years, but credit union leaders have been encouraged to start working on CECL compliance now because it is that complicated.

The awful economy, with its low-interest rates and diminished interest rate margins, has been particularly stressful for leaders at smaller financial institutions. As was said in the July 16, 2016, edition of The Economist the "Buttonwood" opinion essay was entitled, "Slow Suffocation: The financial system isn't designed to cope with low or negative rates." The op-ed concluded, "The irony is that low rates were initially devised as a policy to save the financial sector, and through the mechanism of higher lending, the rest of the economy. Many voters protested about the bailing out of the very institutions that caused the crisis. Those protesters can take only cold comfort that the same policies are now slowly suffocating the industry."

The NCUA's and the state credit union supervisory authorities' examiners will be scrutinizing credit risk management and interest rate risk management - translated by examiners to mean having appropriate policies, practices, technologies, modeling, and testing - that all must be upgraded. Examiners will be tougher on strategic planning and governance compliance. Capital planning and succession planning will also be on examiners' "deep look" list.

Operational risks like resiliency and internal controls are a big compliance concern at smaller credit unions with fewer staff and uninvolved boards of directors. The credit union industry has experienced too many stories about fraud and criminality, especially at smaller credit unions. The Office of Financial Research (OFR) has huge plans to digitally "tag" every financial service provider and every financial transaction such that both the provider and the transaction can be tracked globally.

The National Credit Union Share Insurance Fund (NCUSIF) is "double-counted" as an asset by the credit union and by the NCUA. The NCUA has the actual possession of the credit union's 1 % deposit. The NCUSIF structure and funding needs to more closely resemble that of the Federal deposit Insurance Corporation (FDIC). Congress is unlikely to allow credit unions to continue paying a fraction of the cost compared to banks for the "full faith and credit of the U.S. Government." That will have costs associated with it, as well. Plus, it is a political dilemma of great magnitude for both the NCUA Board and for credit unions of all sizes.

Small credit unions might not be directly involved in taxi medallion loans, however, do the math. The drop in loan values in those taxi medallion loans and related participation loans add up to large numbers. The NCUA will seek out large credit unions to "buy" those bad loans via mergers and purchase and assumptions, but the costs to the NCUSIF could be substantial. And the actual financial status of the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) won't be known until 2021. The TCCUSF's health is very dependent upon the health of the U.S. economy. Many smaller credit unions won't be around in 2021 to find out the TCCUSF's ultimate fate.

And for leaders at credit unions of all sizes, the challenges listed by this correspondent should be viewed as merely the tip of the iceberg. There has existed a dynamic since before the financial crisis that favored larger organizations. The federal government is making it impossible to be small. And the asset size definition of "small" will grow every year between now and 2021, and it will grow ever more rapidly. Is $100 million small? Is $1 billion small? Is $10 billion in assets small? The federally-mandated regulatory compliance burden is crushing Main Street's credit unions while the compliance hurdles to jump are being set ever-higher. Strategically speaking, the time to plan for it and act on the emerging situation is now.

Some short-sighted community bankers might think that dwindling numbers of their tax-exempt competitors is good news. Unfortunately, this isn't a case of "I don't need to run faster than the bear, I just need to run faster than you." While the old adage that "some day you eat the bear, and someday the bear eats you" might hold true in some areas of life, in the case of regulatory burden, the bear is coming to claim both credit unions and community banks. It's an equal opportunity exterminator.

I've been harping about community banks and credit unions making common cause for some time. While some efforts in that direction have been, and are continuing to be, made, thus far, I don't see the results. Time's a wasting'. 

Sunday, July 24, 2016




Watch the complete interview and Read More at Kshb

A social media threat against police and firefighters is making the rounds in the metro area. The post calls on the Crips and Bloods gangs to shed some blood. Word of the non-specific threat came after KCK Police Captain Dave Melton's murder Tuesday and at a time when fatal shootings of police officers are a national concern.
On Thursday, both the KCMO and KCK Fire Departments received notice of this threat along with other area fire departments in the Heart of America Metro Fire Chiefs Council. That organization's headquarters are in Olathe.
The threat reads in part, "As you fight, remember that the fireman and the police are on the same side. Don't be fooled!"

Monday, July 18, 2016

The Role of the Board Chair

Tim Harrington, CPA  
CEO, TEAM Resources

The Role of the Board Chair
Recently I had the chance to spend some time with a great group of board members . One of the things we talked about was the role of the board chair. I thought this well worth putting down on *paper* as it were.
The role of the chairperson is multi-faceted, complex, and often changing within the context of the organization’s dynamic. Unfortunately, there’s no perfect set of “rules.” But there are some guidelines. Here are our “tips” on navigating the position successfully:
 – The board chair must draw together the individual directors into a team, working together on behalf of the membership and the credit union. To do that, s/he must wrangle individual personalities, draw out conversation from some, and rein it in from others. Having a solid understanding of the personalities of each director … and the CEO helps the chair keep things on track, moving forward, and civil.Roles:
Leader – Wait! Isn’t being a leader at odds with being a facilitator? Isn’t this a contradiction? No. There are times when the job is pure facilitation and times when it is leadership and setting direction. A skilled leader will know which is which and be able to handle both without perceptions of contradiction.
Arrives with and without Agendas – What?!
  • Agendas are crucial … if we’re talking about a list of items for keeping the meeting on track: consent agenda, new business, tracking strategy, etc. The chair should put significant thought into the development of these (not simply copy and paste from last month/year). This simple document can decide the direction and productivity of the meeting significantly.
  • Agendas are killers … if we’re talking about an ulterior motive, or a plan to take over, or change the direction of the organization in a contentious way. The chair should have no agendas such as this. His/her job to rally individual directors to create a shared mission for the credit union.
Transparent – the chair has a responsibility to be clear in purpose and approach. See above about the harm of the wrong kind of agendas. Remaining transparent, being clear in communication, and making sure that everyone understands your beliefs, your approach, and your methodology will bolster everyone’s trust in you.
Liaison with the CEO – The board chair is the point of contact for the board to the CEO. Unfettered access to the CEO by individual directors is a recipe for chaos. The chair can be both the unified voice of the board to the CEO, AND the gatekeeper of the CEO, making sure that individuals are not approaching with un-vetted side conversation and efforts to unduly influence.
Meeting Manager – This role is more pragmatic than that of a facilitator. This keeps proceedings efficient, on track and productive. You, as chair, must be willing to cut off conversation appropriately, or promote it accordingly in the interest of time and efficiency.
Accountable – The buck stops here. The chair is responsible for the actions and outcomes of the board as a whole.
Visionary – A leader must be capable and willing to see a future with ambitious goals and help forge a path toward accomplishment.
Strategic Motivator – keeps urging progress towards strategic goals. Reinforces the importance of the mission and vision of the credit union, on behalf of the members.
A Spokesperson for Media – Sounds like a job for the CEO, right? Maybe sometimes that’s true, but not always. The chair should always be ready to step in to speak on behalf of the credit union. (This is part of that “buck-stops-here” thing.) What if the CEO departs unexpectedly, or there is a crisis? It’s up to the chair to represent. And being a capable spokesperson is a great opportunity to reinforce the not-for-profit, cooperative structure of the institution, with a volunteer board setting the strategy and direction.
This might not be everything. We don’t claim to have every scenario nailed down. But it seems a good start.
What are your thoughts? What would you add to this list?

Tuesday, July 12, 2016

Mobile Payments on the Rise

Firefighter credit unions cannot afford to miss out on this rapidly growing part of the financial services industry.

By 2017, mobile commerce revenue will make up 50% of U.S. digital revenue.

See complete story HERE


Friday, July 8, 2016

Fire Family Foundation Establishes Erksine Fire: Rebuilding Lives and Community Fund

Fund Will Assist Fire Victims and Firefighters in Kern County
July  8, Los Angeles, CA:  Responding to the emergency of deadly wildfires that are currently blazing through communities in Kern County, Fire Family Foundation, the charitable hand of Firefighters First Credit Union, has created the Erskine Fire: Rebuilding Lives and Community Fund.
California’s largest wildfire so far this year, the Erskine fire erupted Thursday afternoon and continues to burn; two people have died, thousands have left their homes, 200 homes were destroyed with many others severely damaged. Four firefighters who were working on the blaze learned the sad news that their own homes were completely destroyed by the fire.
The Erskine Fire Fund will dedicate 100% of the funds raised to be distributed to firefighters and fire victims; funds will be used for short-term assistance to pay expenses for essential and immediate needs from food to mortgages/rent
"Our firefighters are battling this fire in awful conditions, with tremendous heat and heavy winds," explains Mike Mastro, Chair, Fire Family Foundation Board, and CEO/President, Firefighters First Credit Union.  "Our commitment is to support our firefighters as well as reach out to those fire victims who are injured or who have experienced a devastating loss from this wildfire. We really want to be that helping hand.”
            Fire victims can contact the Foundation via email at or at (888) 533-4483.
All donations to the Erskine Fire: Rebuilding Lives and Community Fund are tax deductible. To make a donation, visit, or make checks payable to Fire Family Foundation, 815 Colorado Blvd., Los Angeles, CA 90041 with a notation: Erskine Fire: Rebuilding Lives and Community Relief Fund.


Fire Family Foundation responds when tragedy affects firefighters and fire victims.  A nonprofit founded by the respected Firefighters First Credit Union, Fire Family Foundation offers immediate assistance to firefighters and their families, fire victims, fire departments, and charities.  The Foundation believes that by coming together as a “Fire Family,” assistance can be provided to those impacted by fire.

How should a credit union’s board of directors measure its own performance?

NASHVILLE–How should a credit union’s board of directors measure its own performance? And if it has the courage to do so, how can it ensure it’s doing it right?
Questions around credit union governance are critical to any credit union’s success (or failure), and it’s one the Filene Research Institute has explored extensively. Some of the findings around research related to board governance and answers were shared with a large group of board members who turned out for a session during NAFCU’s annual conference here.
“Governance is about confidence in the system,” said Tansley Stearns, Filene’s chief experience officer. “We must be leaders and remain open to new ideas.”
Stearns readily acknowledged all of the challenges before any credit union board and board member, including time demands, economic uncertainty, board diversity, competency, members, training, and liability.
Evolution of 'Owner Power'
Those factors have contributed to an issue frequently cited by credit unions, that it’s very difficult to recruit new, and especially younger, board members. As Stearns made clear throughout her remarks, younger board members can be found, but a credit union needs to commit to it.
“The credit union members are interested in benefits of ownership, but not as interested in participation in governance process. They are passive and will take business elsewhere,” observed Stearns, noting that the research further shows “owner power” evolves as the organization grows, and among members who owns the credit union remains unclear.Those factors have contributed to an issue frequently cited by credit unions, that it’s very difficult to recruit new, and especially younger, board members. As Stearns made clear throughout her remarks, younger board members can be found, but a credit union needs to commit to it.
To engage members as owners, Stearns said one strategy is to make much better use of the annual general meeting (which for many CUs require staff to be on hand to create a quorum).
“Consider making it an extravaganza to attract larger numbers and use it as marketing event,” said Stearns, citing Madison, Wis.’s Summit CU’s AGM as an excellent example. “Can you leverage it to allow people to better understand the benefits of ownership and to allow people to be better engaged?”
What Boards Say
When boards are asked to identify what they believe to be their most challenging responsibilities, the research found:
  • Hiring and firing specialized CEOs.
  • Performing meaningful evaluation of CEO and organization.
  • Assessing and developing and approving strategy.
  • Ensuring appropriate board composition on an ongoing basis.
  • Developing and maintaining effective governance structures, systems and processes.
Stearns noted that as credit unions grow in size and complexity, boards have increasingly ceded power to the CEO, but need to ensure they are informed of industry and credit union trends.
“Do not fixate just on the traditional metrics,” said Stearns. “Remember meaningful member metrics such as Net Promoter Score and Member Energy Score.”
Stearns also told CU boards to:
  • Discuss and review succession planning annually.
  • Value formal mechanisms (formal calendar and agenda) for board effectiveness and diversity.
  • Remember the effectiveness of board chair influences effectiveness of board.
Factors In Strategic Errors
Stearns said Filene’s research has found that when boards make strategic errors, it is often due to one of these factors:
1. Overconfidence. “We may have been on a board for a long time or have a really capable senior team and think, ‘We’ve got this.’ The danger is not looking up and seeing what else is happening.”
2. Mental accounting. Is training just another expense, or an investment?
3. Status quo bias. “We’re really guilty of this. It’s the way we’ve always done it. We’re not adapting. For instance, we won’t close a branch that’s been around for a long time.”
4. Loss aversion. “We are fairly conservative by nature in credit unions. But this is when we don’t want to take additional risks. There are times when we have to be more innovative and take calculated risks.”
5. Anchoring. “This is measuring board performance against a set number in our heads, such as ROA of 100 BPs or better.”
6. Sunk Cost Effect. “We tried something new, and perhaps it’s not working as we’d like, and we don’t make a decision to shut it down. This is about knowing when to pull the plug.”
7. Herd Behavior. “This is somewhat common in credit unions. We see others at credit unions doing it, and we do it, too.”
8. Confirmation Bias. “We think that others think like us.”
9. Mis-estimating future pleasure levels. “This is thinking that things will be more painful or less painful in the long term.”
Good “fodder” for a board meeting discussion(s) should include these topics, said Stearns:
  • Meeting member expectations
  • Developing your human resources
  • Are we meeting financial expectations?
  • How are we dealing with environmental and regulatory forces that may alter the organization and the playing field?
  • How effectively are you operating the credit union from an operating systems perspective? How well are you operating from a learning or change perspective?
Four Types of Boards
Stearns said Filene’s research has found four types of boards in credit unions, which it defines as Scout and New Technology Boards; Challenger Boards, Rubber Stamp and Sleepy Boards, and Watchdog and Micromanaging Boards.
“The best place to be is that Challenger Board, providing lots of support and guidance, but relying on the subject matter experts,” said Stearns.
Stearns said that one way for boards to get some insights into their own behavior and priorities is to keep track of how much time is spent at board meetings on the various points of discussion.
To make the most effective use of time, she said Filene recommends:
  • Ensure all directors consent to agendas outside of board meetings.
  • Schedule all strategic agenda items for the beginning of board meetings.
  • Record and track actual time spent on each agenda item in order to assess whether or not improvements are being made.
Filene's Strategic Cycle
Those points and others should be considered with regularity, said Stearns, noting Filene has developed a Strategic Cycle for the board to help them be more strategic in the long term so that strategy is not just a point in time, such as when the board goes off to an Autumn planning session.
In addressing the NAFCU meeting Stearns touched on several issues that are often hot buttons with board members, including term limits, diversity, and age. She Said Filene’s research has found most CU boards are comprised of eight to 12 directors, and that there is no evidence of a relationship between size of the board and performance of the credit union.
Stearns noted research shows that diversity helps improve board performance, but when she asked for a show of hands among attendees for credit unions with a board diversity policy, no hands were raised.
Not surprisingly, it has found the majority of board members are white males over age 50, but Stearns added, “But social expectations are changing the dynamics there.”
Board members under age 50 make up just 2.1% of board members overall, Filene’s research has found.
“The reason that is a little concerning is that when we go and talk to credit unions about what is there most important strategy, it’s about attracting this next generation, the younger members. If that matters to you then they have to be represented across your organization, and that includes your board.  One way to dip your toe in is to have a Young Adult Advisory Committee.”

'You Might Be Surprised'
Stearns said she has heard from board members saying that no one in their twenties has time or inclination to serve on a credit union board, but that can be a cop-out.
“I think you might be surprised if you asked. The one thing the Gen Y’ers are really, really interested in is doing business with organizations that want to do right by the world.”
Stearns recommended boards recruit new blood by:
  • Taking prospects to dinner
  • Offering a tour of branches and headquarters
  • Inviting prospects to participate in a board meeting
  • Asking for referrals
  • Requiring every director to make a referral on an annual basis, with an emphasis on targeted groups.
By a show of hands, about 10% of those in attendance at the NAFCU session said they have formal board evaluations in place (Stearns said approximately 40% of CUs do), but that not all evaluations processes are “equal.” She said one best practice is to have a third party lead reviews of board members.
“There is a reason for us to take this seriously. The organizations that do formal evaluations are healthier,” said Stearns. “They have a better balance of directors, and actively seek specific director skills.”
Six Strategic Pillars
According to Stearns and Filene, the six “strategic pillars” for a good board include:
  • Anticipate. This is the relentless curiosity to get out and figure out what is happening.
  • Challenge. This is making hamburgers out of the sacred cows.
  • Interpret. This is the ability to have multiple lenses against robust criteria.
  • Decide. This is a balance between detail and speed.
  • Align. This is a board in alignment with the membership.
  • Learn. This is pace of change, continual learning and failing forward.

Friday, July 1, 2016