And the Answer is . . . Rumpelstiltskin !!!

The question is - when and how much should you raise your consumer loan interest rates? Rumpelstiltskin obviously isn't the answer, but sometimes it seems like it's about as good a guess as any. The miller's daughter (trivia question - what was her name?) made an informed choice when she guessed Rump's name and won a color T.V. or a trip or a car. I don't recall all the details.

Anyway, setting interest rates sometimes feels like a guessing game. Due to the likelihood of rising interest rates, you have some decisions to make regarding loan rate increases. Some choices: wait until external rates begin to rise and lag behind the market (to try to pick up market share with lower rates), raise rates in concert with the Fed rate increases, or start raising rates now.

Setting interest rates depends upon many factors including your credit union's philosophy, your ALM position, etc. Just remember that because you are "stuck with" loan terms currently on the books, your overall loan portfolio yield won't change all that quickly.

Here's my two cents: for several reasons, the market can currently bear fairly high loan rates compared to deposit rates. Shop the competition and squeeze out as high a rate as you can now and stay on top of it, raising rates as aggressively as possible. This way, you will be well-positioned once rates move up.

Interest Rate Chronicles

As you undoubtedly know by now, on 6/24/09, the Fed left the fed fund rate unchanged at a range of zero percent to .25% and hinted that the rate would remain low for "an extended period". They also indicated that "the Committee expects inflation will remain subdued for and extended period". The Fed is obliged to talk inflation down - the very belief that inflation is expected can trigger a rise in prices. Inflation is kept in check currently by slightly negative growth, however, the third and fourth quarters of this year are expected to grow by .5% to 2.0%.

An interesting tidbit - the Fed has never raised rates when the economy has negative job growth. But job losses are slowing, and it is projected that if the job situation continues to improve at the current rate, we could see the unemployment situation stabilized by the end of the year and turn the corner by the first quarter of 2010. In addition, Fed Funds futures indicate that the Fed will begin raising rates in January 2010.

Inflation is in check for now, but as soon as things heat up a bit, it will be difficult for the Feds to drain all the money that they pumped into the economy. There is probably a joke related to "drain" and "Feds" and "money" but it's just not coming to me at the moment!

Electronic Funds Transfers (EFT) aka Regulation E.

Due to the advent of electronic banking, we need to keep the EFT Act in mind any time we add or change a product. The Reg was put into place to protect the consumer from the likes of YOU! The Act places virtually all liability for EFT-related errors on the financial institution.

Regulation E outlines the rights, liabilities, and responsibilities of the credit union and members in electronic fund transfer systems such as ATM transfers, bill-payment services, point-of-sale (POS) terminal transfers in stores, and pre-authorized transfers from or to a consumer's account (such as direct deposit and social security payments).

You say you love disclosures? Reg E has plenty, including: the Initial Disclosure, changes in terms, on statements, at electronic terminals, on receipts, pre-authorization, and more!

The EFT Act applies to all financial institutions. Here's a link to the entire Act on FDIC's site. http://www.fdic.gov/regulations/laws/rules/6500-3100.html

Do you have an EFT-related member complaint dispute? Read your EFT disclosures before deciding how resolve to the problem. It could save you from legal/regulatory headaches.

Corporate Stabilization TMZ.

The NCUA held a webinar today to clarify the effects of the May 20th, 2009 amendments to the Federal Credit Union Act. Just a few points of interest:

The impairment to the NCUSIF will not cost natural credit unions any less - we're just putting it on our VISAtm card. The amount will be borrowed from the Treasury by the Stabilization Fund and must be repaid over seven years.

If you assessed the full .99% NCUSIF impairment and premium in the first quarter, congratulations! You did the right thing. In the second quarter, you will book "non-operating income" for the recapitalizaton of the NCUSIF. While the net effect is zero, this is not a reversal of your first quarter entries.

BOTTOM LINE: The NCUA estimates that NCUSIF related expenses for 2009 will be .15% instead of .99% of your insured deposits.

You say you'd rather just take the full "hit" this year rather than deal with it for seven years? You don't have that option, Macho (Wo)Man.

And yes indeedy, expenses related to Stabilization can change. Any bets on whether it will cost us more or less?

You need more information. NCUA Letter No: 09-CU-14 can be found at http://www.ncua.gov/news/express/xfiles/LTCUs09-CU-14CorpStabilizationFundImplementation.pdf

How to Avoid a $500,000 Penalty.

OK, the headline is shamelessley sensational, but who would read about "Placing Holds on Checks"? Remember the cartoon strip "Calvin and Hobbs"? They would come up with games where they would make up the rules as they go; things would get pretty convoluted and quite hilarious! Regulation CC, or the Expedited Funds Availability Act kind of reads like that. Definitely a regulation that was written by committee.

Financial institutions are limited to the types and lengths of holds on checks and "must disclose their hold policies to all account holders, and make the policy available in written form upon request by any customer. It must also be provided at the time of opening of all new accounts. Additional disclosures are required on deposit slips, at ATMS, and when policy is changed in any way". Wikipedia.

Wikipedia has a pretty good chart that details the rules related to check holds. http://en.wikipedia.org/wiki/Expedited_Funds_Availability_Act

Make sure that your Reg CC policy is posted in your lobby, policies and disclosures are up to date, and be sure employees are TRAINED to understand the requirements. It IS true . . . penalties for non-compliance can run as high as a half a million dollars!

Mortgage Rates and Ten-Year Treasuries are BFF (Best Friends Forever)

When it comes to determining where long-term mortgage rates are headed, forget the Fed Funds rate that we hear about when the media says "the Feds are cutting (or raising) rates". Conventional Mortgage rates move lock-step with the ten year Treasury bond rate. You can check the rate online using the ticker symbol "TNX". By the way, the ten-year rate is up 0.1870 to 3.83% today.

Follow this link to view a chart that shows the correlation between the two, and demonstrates how the Fed Fund rate doesn't affect mortgage rates. http://www.hsh.com/images/forgetfed.gif

But no one is saying that the Fed Fund rate doesn't matter. Short term borrowing and savings rates are strongly influenced by the Fed Fund rate.

Pandemic Policy and Business Continuity Plan

Let's say the Swine Flu Virus evolves into a more dangerous strain and hits the U.S. right around flu season. Infected members are carrying it into your branches, sick employees can't come to work, your members are desperate for cash and to do their banking. Do you have a plan to deal with a scenario such as this?

The regulators require that you have a contingency Pandemic Policy and Business Continuity Plan. Here's a clue, it requires more than "take two aspirins and call me in the morning".

Want more info? Here's a link that provides some useful information to help get you started. http://www.cuflu.com/regulatory.html.

Something you might hear at the doctor's office once government sponsored health care starts: "You can get your flu shot as soon as the hypodermic needle is dry".

Interest Rate Chonicles

Treasury yields fell slightly on Tuesday -- a welcome sign for mortgage loan officers who are trying to get their loans closed. Yields on long-term Treasuries had been climbing as demand for bonds weakens due to the surplus of government debt. Treasury yields are linked to mortgages and other consumer loans. Many are concerned that higher borrowing costs could slow a recovery in the housing market.

But (and it's a large but) Housing Starts were much higher than anticipated in May; increased confidence in the economy will encourage investors to take more risk and move out of safe but low-yield treasuries. And, according to an article in Bloomberg, "Russia, India, and China are buying each other's bonds to lessen dependence on the U.S. dollar". These are but two examples of forces that can contribute to the weakening demand for U.S. Treasuries, driving rates upward.
If the expected recovery stalls, rates may hold steady. But there are many indications that rates will continue to rise.

You will read this again and again on this blog. . . pay close attention to your ALM position and be PROACTIVE. Make any necessary adjustments to position your credit union for profitability in a changing rate environment - even if it hurts a little in the short-term.

Do You Have Good Liquidity or are You Just All Wet?

In the T.V. series Lou Grant, the character nicknamed "Animal" marvelled at his friends financial acumen (I am paraphrasing here) "I have a friend that is some kind of financial genius . . . when he gets too much money in his checking account, he sliiiides it over to a savings account, this way he earns interest on his money!".

Managing cash is particularly challenging in this interest rate environment. Loans can be difficult to come by, the direction of interest rates is anyone's guess, members have pulled their money out of the stock market and into your shop, etc. So it is tempting to just leave it in your Corporate account until things settle a bit. However, effective use of your cash is as important as ever. But where do you put all this cash? Depends upon your ALM position.

At the risk of stating the obvious, be sure to put any idle cash to work, even if it's in short-term CDs or investments. The income adds up. Complete a cash pro-forma each month (informal is fine for a small credit union) so you can determine how much cash you will have and plan accordingly.

Exciting News!!! New RESPA Rules!

New Real Estate Settlement Procedures Act (RESPA) Rules are effective January 2010.
First a little trivia: RESPA was enacted in 1974 to help members make informed choices regarding settlement costs pursuant to a loan transaction. It allows consumers to obtain information on the costs of a mortgage so they can shop for settlement services and it also protects consumers from excessive settlement costs and fees.

The new rules require additions and changes to the disclosures you provide to your members. Follow this link to a nice summary by First American Title Insurance Co. http://sw.firstam.com/az/index.php?option=com_content&task=view&id=99&Itemid=55.

If you need more information than this, go to . . .
http://www.getalifedudeorapuppycauseyouhavetoomuchtimeonyourhands.com/

Red Flag on Red Flag Rules

By now you should have your Red Flag Policy and program in place. Simply put, The National Credit Union Administration’s (NCUA) Red Flags Rule requires federal credit unions to develop and implement a written, risk-based identity (ID) theft prevention program to detect, prevent, and mitigate ID theft in connection with “covered accounts".

Here's a head's up: be sure your indirect dealers understand the rules and abide by your policy.

Interest Rate Chronicles

This is a direct quote from a Yahoo finance article:
"The government sold $19 billion in 10-year Treasury notes in a relatively weak auction. There were plenty of bidders, but the government had to lure them in with a higher yield than the market had anticipated. The yield on the benchmark 10-year Treasury note rose for the fourth time in five days, jumping to 3.95 percent from 3.86 percent late Tuesday."

The concern is that because the government must sell trillions in Treasuries in the coming months and years, the weak auction this early in the game could foretell that rates will rise faster than expected.

The moral of the story - sharpen your ALM pencil!

Office of Foreign Asset Control (OFAC)

OFAC requires credit unions to verify that new members are not on the "SDN" list. The list includes names of terrorists and drug dealers and other bad guys. A "hit requires you to freeze assets and contact OFAC. In addition, existing members must be scanned to be sure they haven't gone astray since the account was opened. Be sure your efforts are documented - even if you miss one, the Feds will likely give you a pass if you did proper due-diligence.

Hint: go to http://www.ustreas.gov/offices/enforcement/ofac/sdn/index.shtml to get the list in Word or PDF format. You can then "control F" on your keyboard to search the list for free.

Interest Rate Chronicles

Russia has announced that they will be reducing the amount of U.S. Treasuries on their balance sheet. Whether this means they need the cash or they expect interest rates to rise is not relevant, the U.S. may find it a challenge to finance its unprecedented deficit spending going forward. Rates may have to rise to attract investors. (See June 9th blog "Mortgage Rates on the Rise).

Bank Secrecy Act (BSA) Annual Review

BSA reviews are required to be completed on an annual basis. There is no requirement that the review be completed by an audit firm or other third party. It is recommneded thay you assign the project to someone within the credit union who is reasonably independent from the process to SAVE MONEY. For example, the audit/review should not be done by a branch manager because she would be auditing herself. The NCUA and FDIC (Gasp!) both have a nice checklist that most examiners consider to be quite thorough.

Examiners look for assurances that the internal control process is reasonable so be sure training is a major component of your BSA program.

Mortgage Rates are on the Rise

Advise your members who are "on the fence" regarding a mortgage refinance to consider moving now, before rate rise further. But consider selling them to Fannie or Freddie so you aren't "holding the bag" for a bunch of low-yielding assets a couple of years from now. However, if you are retiring soon, I wouldn't lose sleep over it because it becomes someone else's problem after you leave to travel around in your new Winnebago.

We have seen Mortgage rates rise in the last couple of weeks. Where will they go from here? Of course, no one has found a reliable way to determine which direction rates will move. However, it appears that investors are willing to take on more risk and move out of the safety of treasuries, lessening demand. While Mr. Geithner denies it, the Fed is monetizing debt by buying treasuries, and we are faced with unprecedented deficits. Inflation is a real threat. . . throw in a pinch of the possibility that foreign governments (read China) may shy away from buying U.S. debt and you have rates on their way up. We are discussing long-term rates here, but short-term rates are likely to follow. The Feds have recently said that they will do what is necessary (increase the target lending rate) to control inflation.

There are 10 year and 30 year Treasury auctions on June 10th and June 11th. Many consider these auctions to be an important bellwether. If demand is low, rates will increase in order to attract investors, and mortgage rates will follow.

Here's another way I know rates might be going up - our brokers are desperately trying to sell us mortgage-backed investments that they own. A restraining order may soon be necessary.

Tom Dluzen

New Credit Card Legislation

This is a major overhaul of Regulation Z (Truth in Lending). Yes there is new legislation, and yes it will affect us substantially, but the regulators still have to write the regs and this takes time. However, there are some time lines that come up rather quickly. For instance, by August, members must receive their statements 21 days in advance. This law is mostly in response to some of our banking brethren.

IF you keep changing due dates to trick people into paying late fees, you just might be a banker.
IF you set early deadlines for receiving payment (ie. 7:15 a.m.) you just might be a banker.
IF you increase rates because your member paid his child's lunch money late, you might be a banker.

The legislation was passed to avoid these kinds of abuses.

Anyway, be aware that you may have to change your disclosures, and it is imperative that you start working with your processor or IT people ASAP.
Apologies to my banker friends who don't abuse the rules!

Tom Dluzen