The new CARD Act Includes Gift Card Changes

As you may have noticed, the CARD act applies to much more than just credit cards. Your Gift Card program will also be affected. Along with Home Equity Lines, unsecured, and other secured lines of credit. It even takes a shot at gift certificates. . . and don't forget Protecting the Right of Individuals to Bear Arms in Units of the National Park System - I'm not kidding, this is actually in the CARD Act. Ever wonder how many laws and regulations our lawmakers can actually come up with? I'm hoping they run out of ideas soon.

The law amends Regulation E to prohibit a credit union from charging dormancy/inactivity fees, or service fees on a gift certificate, store gift card or general-use prepaid card. But a fee may be assessed after 12-months of inactivity. Only one fee can be charged each month, and the proper disclosures have been given at the time the card was purchased.

In addition, a gift certificate, store gift card or general-use prepaid card cannot have an expiration date earlier than 5 years after the instrument was issued or the date on which funds were last loaded on to the card, and the terms of expiration must be clearly stated. The Fed has yet to provide the amount of fees that are acceptable. The Fed is to issue final regulations with an effective date 15 months after the President signed the CARD ACT.

Help Your Members With Free or Affordable Health Care

The national discussion related to affordable health care discussion seems to be all the rage today. A little secret . . . there is already free or affordable health care available to anyone who needs it.

Train your front-line people or collection people to listen to your members. Are they having financial problems due to health care costs? Right from the Federal Health Resources and Services Administration Site:

Federally-funded health centers care for you, even if you have no health insurance. You pay what you can afford, based on your income.

Health centers provide:

checkups when you're well
treatment when you're sick
complete care when you're pregnant
immunizations and checkups for your children
dental care and prescription drugs for your family
mental health and substance abuse care if you need it

Click on the link to the FHRSA, input the address, and find a nearby health center. It's easy, and you might just save a life, or maybe a bellyache, possibly a toothache.

Fed Slows Mortgage Purchases, Sees Stronger Economy

Sept. 23 (Bloomberg) -- The Federal Reserve will slow its purchases of mortgage securities, seeking to avoid disrupting the housing market as an economic recovery takes hold.
“The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010,” the Federal Open Market Committee said in a statement today after meeting in Washington. The $1.45 trillion program was scheduled to cease by the end of this year.
Chairman Ben S. Bernanke and his fellow policy makers indicated for the first time since August 2008 that the economy is accelerating, even as they recommitted to keep their benchmark interest-rate “exceptionally low” for an “extended period.” Today’s statement signals the Fed will maintain its stimulus measures to secure a recovery and reduce unemployment.
“The mortgage market has gotten a reprieve, and mortgage rates may stay low going into the spring of next year,” said Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York

See the Complete Article

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Told You So . . . Senator Dodd is Introducing a Bill Regulating Overdraft Fees.

If you haven't taken a look at your NSF and "Courtesy Pay" program in a while. This would be a good time to do so. . . you might be surprised at how much revenue you realize from these programs. And it all may change very soon. I don't mean to sound like a broken record (I've written several articles about this since July 1st, 2009), but you might want to come up with a plan to somehow replace potential lost revenue.

Here's what Sen. Dodd has to say “Excessive, automatic overdraft fees are forcing many American families deeper into debt at a time when they are already struggling to make ends meet,” . . . “I am working on a bill to protect consumers from these fees.” Representative Carolyn Maloney, chimed in “The evidence is overwhelming that bank overdraft fees are out of line, and that banks are milking their system for all it’s worth,” . . . “It’s time to crack down -- as Congress has already done with credit cards.”

According to Bloomberg, Dodd’s bill would require customers to “opt-in” to banks’ overdraft protection programs, prohibiting lenders from automatically enrolling their customers in the plans. It's not clear whether your current program will be "grandfathered" in.

Couple this with the letter that Democratic leaders sent to the Federal Reserve back in June 2009, and an abundance of horror stories from consumers (just do a search online, you will see what I mean), and I believe we will see some significant changes in NSF requirements soon.

Who's the Boss? The Auditor, Examiner, or You?

Janice Hollar, a management consultant with Janice Hollar & Associates wrote an excellent article related to a common trap that credit unions often fall into: managing your credit union to keep the examiners and auditors happy. If you find yourself worrying about getting a near-perfect exam or audit, then you probably have taken your eye off the ball and have your priorities out of order.

Ms. Hollar explains that, while we must operate our credit union's in a safe an sound manner, "managing the credit union to a CAMEL ratio does not necessarily mean you are satisfying the boss that matters most: the member owners".

Exams and audits can be an important tool. But, as Janice says "Don’t ignore the CAMEL. Just don’t rely on it alone. If the CAMEL is poor, obviously there is a problem. But if your CAMEL is good, it’s not an indication that everything is fine". Take a minute digest how relevant the findings actually are. If it is just minutia, then the examiner/auditor ran out of important issues to review. . . address the items, then get to work on the important issues and grow earnings and capital by servicing new and existing members.

Want some advice on how to get the examiner or auditor out of your credit union quicker? Try some of these useful tips:

1. Tell everyone to speak only in a "robot" voice the whole time they are in.

2. Tie jingle bells to all your clothes.

3. Deliberately hum songs that will remain lodged in the examiner's brains, such as "Feliz Navidad", the Archies "Sugar" or the Mr. Rogers theme song.

4. Borrow the examiner's pen, then chew on it before returning it. Repeat.

5. Never break eye contact when talking to the auditor, all the while bobbing your head like a parakeet.

Risk Based Examinations. A Quick Overview.

Examinations have migrated considerably from the "bad old days" where an examiner would review a slew of items and report any number of minutia. If I didn't know better (I don't for sure), I would have bet big money that they were paid by the word. The reports were often useless in determining where potential risk, if any, needed to be addressed. Since then, examinations are intended to be more focused on "the forest instead of the trees". Hence the advent of the Risk Focused Examinatin Program.

Right from the NCUA examination manual; "While performing risk-focused supervision, examiners should look for sources of uncertainty within the operation of the credit union. Based on their findings and using their professional judgment, examiners will prioritize these risks by the magnitude of the potentially adverse effect on the earnings and capital of the credit union".

Regardless of what the examiners will review, your credit union should focus on risk management, it's just smart management. This includes a strategic plan with implementing policies, procedures, and internal controls necessary to manage inherent risk. The seven categories of risk for credit union supervision purposes are Credit, Interest Rate, Liquidity, Transaction, Compliance, Strategic, and Reputation risk. Ignoring any one of these risks can mean big trouble. Be sure you have policies in place that address all of these areas, and DOCUMENT your efforts to ensure that your credit union actually follows your policy and procedure. Examiners are funny about this.

Unrelated but in the news: on President Obama's discussion with children across the U.S. . . .
"The President also said that kids -- he told them if they study hard, the United States will continue to prosper. Then he added, 'But just to be safe, bone up on your Chinese.'" --Jimmy Fallon

Bank Pain, Credit Union Gain. Commercial Property Forecast : Forget the Umbrella, Bring a Lifeboat.

The credit union industry can thank their lucky stars that the NCUA didn't raise the 12.5% commercial loan cap (yet). Plenty of small and medium-sized banks loaded up on developer loans just as their big brothers scarfed up home mortgages during the housing bubble. But that's not to say that some credit union's didn't take the bait and jump into the "profitable" commercial loan ocean as well. Many more banks and maybe a few credit unions will likely end up in Davy Jones' Locker because they took the plunge.

The outlook: vacancies are rising causing rents to fall, and it is estimated that up to $300 billion in loans will mature this year; commercial loans are often written with a balloon note. Even if the loans are generating sufficient P&I payments, property values have fallen so much that the lender may not or cannot re-write the loans. As a result, according to The Kiplinger Letter, defaults will soar from about 1.6% in 2008 to 5%.

It is highly likely that a good number of your competitors are on the ropes. They are forced to charge more for loans, if they are lending at all. Do some homework; what are their weaknesses? Find out. No need to take unnecessary risk, but you may find that this is a perfect time to pick up some market share. Yes, you need to watch your expenses, but don't stop advertising. Just make sure that the advertising you are doing is effective. Demand that the people who you pay to do your advertising can quantify the expenditure.

Short-Term CDs, a Lullaby.

Remember the sweet little lullaby Rock-a-bye Baby? - It's very soothing, puts the baby to sleep, nice. That is until you consider some of the lyrics: "When the bough breaks, the cradle will fall. And down will come baby, cradle and all".

Market Rates Insight has released a new analysis which confirms what most of us already know. Members are eschewing long-term CDs for short term deposits. This has been the trend for at least the past year, and as a result, the typical credit union's cost of funds has dropped rather quickly and significantly. Since deposit interest rates are historically low and you still hold loans and investments booked during a period where rates were higher, your bottom line is looking better (aside from loan losses, a Brother's Grimm story). Heck, you can even run a loan special a very low rates, right? "Rock-a-bye baby. . ."

Flash forward. Rates begin to rise, and all that short-term money begins to reprice. Quickly. Within a year. You hear someone say, "hey, what's happend to the bottom line? It turned all red". That loan special you were so proud of? No one is claiming credit for that brain-child anymore; and "down will come baby, cradle and all. . ."

The good news? Rates probably won't move much within, say, the next year or so. But once they do, they can move quickly. Age-old advice that the wizened give - be forward looking and get your balance sheet in order, you might have a little time.

Credit Card Act Compliance. A Little Break. Maybe.

The Credit Card, Accountability, Responsibility, and Disclosure Act of 2009. I get it! the C.A.R.D. Act . . . those wacky congress folks are so darn clever with the names of their regs.

Under the CARD Act, credit unions are required to deliver periodic statements for open-end consumer credit plans at least 21 days before the payment due date, this portion of the Act is effective August 20, 2009. According to a recent NCUA Release, "the Federal Reserve Board acknowledged that some creditors may experience difficulties, for open-end credit plans other than credit cards, with revising their billing systems by August 20", and "that for a “short period of time” a creditor “may remedy this technical issue by prominently disclosing elsewhere on or with the periodic statement that the consumer’s payment will not be treated as late for any purpose if received within 21 days after the statement was mailed or delivered.”

The NCUA will review credit unions on a case-by-case basis to determine if reasonable efforts have been taken to come into compliance with the CARD Act. In any case, no late fees should be imposed under these circumstances.

Speaking of credit cards, my card was stolen a few weeks ago. I told the credit union to just let the thief keep it . . . he spends a LOT less than my wife. Ba-dum-dump!

Employment Data Due on Friday

The market is expecting unemployment to rise ever so slightly from 9.4% to 9.5%. A lower than expected unemployment rate may be one more signal that the recession has hit bottom and the economy is turning around. A higher than expected rate could mean we are in for six more weeks of winter. No, wait, that's Puxatony Phil.

The employment report is considered the most timely and broad indicator of economic activity released each month. The average workweek is an important part of the employment report because it can be a determinant of personal income and a useful indicator of labor market conditions: a rising workweek may be the first indication that employers are preparing to boost their payrolls.

Why is this so important to credit union managers? Higher employment is likely to lead to what we will call a "normalization" of interest rates over the next year. If you are getting close to budget time, determining the direction of rates will go a long way towards providing you with a meaningful financial "road map" and help you plan for the coming year. Because interest expense is such a large line item, a wrong "guess" on interest rates can make a real difference in the accuracy and usefulness 0f your budget as a Board and management tool.

There is more information related to employment than you could ever want at http://stats.bls.gov/news.release/empsit.toc.htm.

SAR Improvements and Other Fun Facts.

Priority = High

Ever wonder whether anyone gets a Suspicious Activity Report (SAR) you filed? Does anyone really care about all the hard work you put into filling out the form just right? Unless the filing gets the attention of law enforcement (or you made a glaring error), you really can't be sure that the SAR arrived safely at it's destination. Until now, that is. on September 12, 2009, FinCEN will implement SAR Acknowledgements for BSA Electronic Filing submissions. More information can be found on FinCEN's SAR Acknowledgements and Validations Questions and Answers Guide.

A little bit about SARs:
A credit union must file a SAR when it knows or suspects that:
The funds come from illegal activity or disguise funds from illegal activity; the transaction is structured to evade BSA requirements, (for instance a member makes more than one deposit to circumvent the $10,000 cash reporting rules); apparent unlawful purpose; or, the credit union is being used to facilitate criminal activity.

Credit Unions are required to file an SAR report following the discovery of: insider abuse involving any amount, violations aggregating $5,000 or more where a suspect can be identified, or violations aggregating $25,000 or more regardless of a potential suspect.

Considering all the attention on Privacy rules, the requirement to file an SAR only upon a "hunch" seems oxymoronic (no moronic jokes, please). So it's tempting to error on the side of caution and file an SAR only when the law has clearly been violated. But be careful, there are penalties for those individuals that fail to file an SAR as required or disclose to the member that they have filed a SAR about them. Penalties include extremely high fines and long prison sentences if found guilty. In addition, financial institutions face penalties for failing to properly file CTR and SAR reports, including heavy fines and regulatory restrictions, even to the point of charter revocation.

But not to worry, the government says you can't be held liable for information filed on a SAR report.

Another $1 Billion Stabilization Assessment?

I'm going to be lazy today and just provide you a re-print from CUiSIGHT.com and the Credit Union Journal. But this is important. I know what my boss might be thinking . . . I'm always lazy!

NCUA Prepares Special Insurance Assessment August 28, 2009 – Credit Union Journal

ALEXANDRIA, Va. – NCUA is putting together a proposal that will require credit unions to pay another $1 billion into the National CU Share Insurance Fund in the face of rising credit union losses and expanded coverage on member deposits.

The additional charge will be voted at the Sept. 24 NCUA Board meeting, according to John McKechnie, NCUA chief spokesman. Credit unions would be required to pay the extra charge in the fourth quarter.

The new charge is on top of $1 billion credit unions are expected to pay annually over the next seven years to fund the corporate credit union bailout. Those charges have been moved from the NCUSIF to a new Corporate CU Stabilization Fund, which will effectuate the corporate bailout.

Right to Financial Privacy (RPFA). Be Careful.

RISK LEVEL = HIGH

RFPA protects the personal financial privacy of federal credit union members by restricting access to the member's financial records.

A scenario: a local police officer comes into your office and tells you that he is investigating your member for his role in a fraud case involving the member's checking account. Just give him what he needs, right? Not so fast! The RFPA requires that the credit union obtain written authorization from the member, or secure from the government authority a subpoena or summons, a search warrant, a judicial subpoena, or a formal written request to release information about a member. Afraid to tell the cop you can't help him? Try this, it works for me . . . look around the room suspiciously, then quietly inform him that you can't help him because you believe he exists only in your imagination. He'll likely get scared and leave - at the very least, he'll go ask someone else.

In addition, policies and procedures for complying with the requirements of the Right to Financial Privacy Act (RFPA)are required. A good policy and due diligence to comply with the Act will keep you out of trouble. Compliance risk can occur when the credit union fails to implement the necessary controls to comply with RFPA; and Reputation risk can occur when members of the credit union learn of its failure to comply with RFPA. Risky business, that RFPA.

Warren Buffett, Mr. Know it All.

Warren Buffet is concerned about the tremendous mountain of debt the country is piling up. Last year he said we were justified in using any means necessary to stave off another Great Depression. Now that the economy is beginning to recover we need to curtail our out-of-control spending, or we'll destroy the value of the dollar and many Americans' life savings.

Some fun facts from Buffett's article today in the New York Times:

Congress is now spending 185% of what it takes in
Our deficit is a post WWII record of 13% of GDP
Our debt is growing by 1% a month
We are borrowing $1.8 trillion a year

$1.8 trillion is a lot of money. Even if the Chinese lend us a record $400 billion a year and Americans save a remarkable $500 billion and lend it to the government, we'll still need another $900 billion. So, where's it going to come from? The printing press. And, ultimately, Buffett says, that will destroy the value of the dollar. There goes inflation and by extension, interest rates.

But what does Warren Buffet know anyway?

My personal conspiracy theory: The Obama administration is counting on high inflation to 1. resolve the real estate crisis by increasing the nominal value (as opposed to the real value adjusted for inflation) of real estate, and 2. allow them to repay all the money the government is borrowing with inflated dollars. It won't be the first time in history that high inflation has had both positive and negative effects on the economy. Hope you are getting ready for the ride! The true test of the effectiveness of your ALCO/ALM Committee efforts today will show once inflation is a reality.

Appraisers Under New Scrutiny - Revisit Your Appraisal Policy

An article appeared in the Wall Street Journal on 8/18/09 that (again) scrutinizes the validity of real estate appraisals. (Click here for the complete article). The Regulators have been vilified in the press regarding their role in missing the housing debacle. You can be sure they are paying close attention to media scrutiny.

The role that appraisers played in the crisis is a matter of considerable discussion. Regardless of where you stand on the matter, the Regulators are taking a closer look at whether or not financial institutions use competent appraisers. It would be a good time to review your appraisal policy and at the very least, be sure you have all your "ducks in a row"; make sure you have a current list of approved appraisers, an updated copy of their license, etc. And don't just look at the bottom line value. Check each appraisal to be sure all required components are included. A checklist is always a good idea, and an appraisal policy is REQUIRED.

Speaking of crisis, the Chinese word for "crisis" contains two characters. One of them means "opportunity". Now that real estate values are correcting themselves, mortgage loans may have become a safer bet, at least as far as the underlying collateral value is concerned. But, due to historically low rates, be aware of interest rate risk. No need to stop selling to Fannie and Freddie. But to book mortgages in your portfolio, wait for the perfect storm - rates rise to a "normal" level, unemployment levels off, and collateral values can be trusted.

NCUA Regs require state-certified or state-licensed appraisers. The Reg states that appraisers must (1) have demonstrated competency, (2) subject their professional conduct to effective supervision, and (3) perform written appraisals in accordance with the Uniform Standards of Professional Appraisal Practice.

Do you need your state's appraisal licensing board contact information? Click Here

Real home values depend upon an appraisal about as much as the economy depends on economists as the weather does on forecasters. You should know your market, use common sense, and be sure your appraisers valuation makes sense.

Growth Starts at the Top

It's said time and again that if you aren't moving forward in business you are moving backwards. Most credit unions desire some level of growth and there is plenty of advice out there related to setting goals, action steps, positive feedback, and on and on. This is all very useful information. But I've seen it time and again, the most effective leaders lead by example. Your most senior loan manager should be a top producer, ditto your branch or mid-level managers. It simply sets the tone for what is expected and definitely reduces underlying resentment from their teams.

A know a Senior Vice President at a $1.5 billion bank, (a busy guy, as you can imagine) who leads in this way. Month after month he somehow finds the time to make nearly the most business calls, and is often the top producer of the entire loan function. His team admires him and doesn't mind working HARD as well - and the results show. Actually, he was my boss at one time and now I'm getting all teary-eyed and nostalgic (OK, maybe I'm exaggerating a bit).

Do your senior managers lead by example, or just hand-down edicts to their "subordinates"? (I don't like this word, but it fits in this case). They don't necessarily have to be a top producer, but by being "in the trenches" with their soldiers, they will earn respect and you will likely see an increase in production across the board.

"A leader is one who knows the way, goes the way and shows the way". John Maxwell

Shocker! FASB Proposal - Mark to Market Soon to Apply to All Loans?

The FASB met on 8/13/09 to consider expanding mark-to-market accounting rules to good old-fashioned traditional loans. I am NOT making this up!

Mark-to-market requires financial institutions to determine market values on their traded securities, but is currently not required for loans carried on the balance sheets of banks and credit unions. The FASB is expected to release a formal proposal on the changes in the first half of 2010.

This would be a MAJOR change in accounting rules and could force credit unions to take losses, and hinder their ability to meet capital requirements. Imagine this scenario: Interest rates move up quickly, which would in turn mean your loans have less value; who would purchase loans with a lower yield than market interest rates? You would have to sell them at a discount, yes? With mark-to-market applied, you will have to reflect the lower "value" on your books. How is market value determined? There are plenty of questions.

Sometimes, FASB proposals die on the vine, and this one may wither away too, especially with the banking industry gearing up for a dogfight. Hopefully, the credit union industry will nip at FASB's heels as well. But this one just may go through, as there has been a concerted effort to make accounting rules more international in nature - the International Accounting Standards Board has made moves towards mark-to-market for loans. Click here for a related CNBC Article.
I've been trying to come up with an alternative for the FASB acronym. So far I have (der) Fuhrer Accounting Sadistic . . . I need something for the "B" any ideas what the "B" could be?

The Story Behind the Fed Funds Target Rate Announcement.

The Feds left the target rate fed funds interest rate range steady at 0% to 0.25%. This was no surprise. Perhaps more importantly, though, they announced that they will begin reducing the amount of Treasuries they have been buying to help offset the amount of debt needed to cover the government's spending spree. This could reduce demand and contribute to a rise in the 10 year Treasury rate. The 10 year rate affects mortgage, commercial, and other consumer loan rates. Diminished demand for Treasuries will drive rates upward, as rates must increase to attract investors. Some other forces that could affect demand for Treasuries:

1. With more confidence in the economy, investors may move their money out of the safety of Treasuries and into investments that provide a higher yield.
2. The government will need to issue more debt (treasuries) than at anytime in our history, increasing supply.
3. Some say that foreign investors may begin reducing their purchases of our debt, or simply would not have the capacity to purchase the trillions in debt necessary to fund the stimulus and new White House initiatives.

If the government would have to raise the interest it pays on it's debt due to increased supply and decreased demand, it would prematurely drive up borrowing costs at a time the economy appears to be on the cusp of recovery.

Did you know that the Prime Rate was as high as 21.5% in 1980? For several recent decades, a 10% Prime Rate was not unusual. Can it happen again? What if it does, or something close to it? What would happen to your credit union's financial condition? The importance of a good Asset Liability Management program cannot be stressed enough.

Also during the Fed meeting, Federal Reserve Chairman Ben Bernanke said he would be willing to serve another term. He said, 'Where else would I get a job in this economy?'

Business Continuity Plan (aka Disaster Recovery). Teacher's Manual.

When I was in elementary school, I was always amazed at how smart the teachers were. Then I found out that THEIR book had all the answers . . . .

The FFIEC has published their Business Continuity Plan examination manual. Because your examiner uses the manual, just follow the guide and you should have no problem passing your next exam with flying colors. A hint - examiners are BIG on testing. Put your plan in place, test the various parts of the plan, and document your efforts. If you don't document your efforts, then the examiner will assume it wasn't done. How many of us have learned this lesson time and again? I just raised my hand.

Follow this "examination manual" link and you will have all the Business Continuity information you could ever ask for, and more.

A little conversation I had with my fifth grade teacher one day. . . Me : I don't think I deserved zero on this test. Mrs Norton: I agree, but that's the lowest mark I could give you.

USA Today Slams Credit Union Courtesy Pay Fees

Still not too worried about potential changes in Courtesy Pay regulations? It's the big bad banks that people worry about, not us, we're the good guys, right? The Courtesy Pay cash cow most credit unions depend upon may change your hard-fought image in a hurry. Frankly, Courtesy Pay is a little hard to defend. USA Today released an article that calls the Credit Union industry out on their "people helping people" image. Among the quotes from the article:

"they're just not any different than a bank."
"they find every opportunity they can to zap you."
"It's sort of like Robin Hood in reverse,"
"credit unions have also focused more on fee income — and strayed further from their mission of helping members"

They also point out that the Obama administration is pushing to create a regulatory body that could require financial institutions to get consumers' explicit consent for these loans, disclose the credit's high interest rates and warn borrowers at checkout if they're about to overdraw. These efforts, if successful, would cap how much federal credit unions can charge for overdraft fees. That's because if courtesy overdraft is defined as a loan, it would be subject to an interest rate cap — currently 18% — on loans made by federal credit unions. To put this in perspective, this cap could reduce your fee revenue to a small fraction of what you currently earn.

According to Evan Clark, a government based credit union CEO, "There are a lot of credit unions that, if they didn't have overdraft income, they'd go under". Is your credit union in this camp? As I've advocated in the past, it would be prudent to begin a contingency plan now, before the Courtesy Pay rug is pulled out from under you.

Speaking of rugs, also in the News : It was so hot today that thing on Donald Trump’s head was panting.

Big Bailout Banks Belly-up to the Bond Buying Bar.

According to Bloomberg, lenders that were bailed out by the Government have been purchasing Treasuries at a rapid pace. Whether the purchases are a return "favor" to the Feds to help keep interest rates low is purely speculation. Add this activity to the $1 trillion of debt the Feds have already pumped into the system (by buying treasuries), sprinkle the additonal $300 billion they plan to purchase over the next six months, and you have interest rates on ten-year treasuries being held artificially low (the ten-year is a benchmark used to set mortgage and commercial loan rates).

Let simmer for about a year with the 2.9 trillion in debt the government still needs to sell and you have a great receipe for inflation and rapidly rising rates. Or maybe not. The direction of rates are notoriously hard to call. But be prepared. This period of relative calm before the storm is a good time to get your ALM position in order.

Fun Fact: Did you know that a Billion in the U.S. is a thousand million, but a billion in Europe is a million million? I wonder if anyone has ever wired the wrong billion overseas. Anyway, it's all a gazillion to me.

More Losses at U.S. Central.

In the 1942 classic movie Casablanca, Captain Renault, in an attempt to get himself out of trouble, said he was shocked, SHOCKED that there was gambling going on at Rick's Cafe (as a croupier hands him a stack of cash).

Likewise, I'm sure that U.S. Central's management team was shocked, SHOCKED to hear last week that USC had an additional $537 million of losses on their mortgage securities that they didn't know about before the audit. The losses will adversely affect its corporate members and, guess who ultimately gets to pay the tab? Yep, natural person members of most of U.S. Central’s 27 corporates. Translation - your credit union. Check your Corporate's website or with your Rep to determine the cost to your credit union; you may have to write down your capital shares with your Corporate.

More information can be found in a Credit Union Journal article.

NCUA Deposit Insurance on Steroids.

By now it's old news that, in May, the Feds raised NCUA deposit insurance coverage to $250,000. Yes, the the coverage likely will become a permanent change, but the Act states that the increased coverage expires on 12/31/2013.

Many members believe that the most their deposits can be insured for is $250,000. The NCUA provides a nice brochure that does a good job of explaining the complexities of deposit insurance. One example they cite is that a family of four could be insured for up to $3.5 million if they structure the accounts properly.

A couple of handy resource links to have available in case members have questions.
1. The NCUA "Your Insured Funds" Brochure.
2. The Online Share Insurance Calculator.

You may find that the calculator puts members at ease when it comes to explaining increased coverage; print the results and provide them a copy.

In the News:
JAKARTA, INDONESIA—Its currency and economy decimated by the lingering Asian financial crisis, Indonesia received welcome news Tuesday, when the World Bank announced it would offer the struggling nation totally free checking.

"Indonesia can say goodbye to high checking fees," World Bank president James D. Wolfensohn said. "No monthly service charge, no per-check fee, and free touch-tone balance information are just some of the benefits Indonesia will enjoy with the World Bank's 'Totally Free Checking' program. And there are no strings attached and no hidden fees—that's the World Bank guarantee!"

Wolfensohn added that if Indonesia opens a Totally Free Checking account by Oct. 15, it will receive a free athletic bag.
(The Onion News excerpt)

Call Report Software Now a Thing of the Past.

In September 2009, the NCUA will require that the quarterly Report of Officials and 5300 Call Report information be submitted on their new web-based system as opposed to using the quarterly software. NCUA is hosting several webcasts to provide you with information related to the switch. The first webcast will be Wednesday, August 12, 2009 at 1:00 PM EDT. To register, go to http://event.on24.com/r.htm?e=153687&s=1&k=D7CCC63C961E35B7BD87B6ED7DF01A01

The NCUA has also put out a FAQ document that should answer most of your questions. Here's the link http://www.ncua.gov/DataServices/Data/5300/09July/OnlineFAQ.pdf.

If you are the person responsible for preparing the "Call Report" or 5300 data, we just want to take a minute to thank you for all your hard work. It's a Herculean effort each quarter, and chances are, no one at your credit union appreciates what you go through. Today, we salute you, Call Report Preparer. Sure, there is great danger of paper cuts. Ink on your hand? You bravely soldier right through. Lunch? Maybe after you calculate net charge-offs. You are the REAL Real (Wo)Men of Genius. We crack a can of sugar-free, decaffeinated iced tea to you, the Call Report Preparer.

Horizontal Analysis.

When I mentioned to a co-worker that I was going to work on my Horizontal Analysis, she asked me if that meant that it was "nappy" time again. The common response to that is "very funny, but don't quit your day job to do stand-up". My response was "that's funny! you ought to quit your job to do stand-up". As of this writing, she is still here . . . but I'll keep you posted. I asked everyone to laugh at every little thing she says.

A Horizontal Analysis can take many different forms and is a fundamental tool that many finance and accounting professionals use to analyze the balance sheet and income statement. If you download all of your general ledger accounts and put them side by side in a spreadsheet, you can easily and quickly spot trends. It is also used to detect potential errors. For instance, if a GL account balance suddenly spikes up or down one month; it's worth a look to see if something was posted incorrectly. The possibilities are endless! I know what you're thinking . . . "those finance and accounting types lead VERY interesting lives!!!"

A pretty good example and definition can be found at http://www.accountingformanagement.com/horizontal_analysis_or_trend_analysis.htm

Stay tuned. One of these days, we'll talk about VERTICAL Analysis.

Credit Union Bond Renewal. Do Some Homework.

Deciding which carrier to use for your Credit Union Bond can be a challenge. For several reasons, it would be a huge mistake to just automatically renew your bond with your current carrier. Number one is cost. I can speak from personal experience that you can save upwards of 30% for equal, possibly better, coverage just by shopping around. Just to put things in perspective; a $30 million credit union saved $9,ooo just by making a switch. The CEO testifies that claims were paid without a hassle and service was excellent.

But you just love your Rep, and you couldn't do that to him/her? If they are charging you 30% more than they should, they aren't doing you any favors.

Get several quotes, find out which services they offer, etc. When they discover that you are shopping around, your current carrier may miraculously find a way to reduce your premium. In any case, make an informed decision.

The NCUA has approved about a dozen carriers. A list can be found here: http://ncua.gov/Resources/AdministrativeOrders/Bonds.aspx

A personal story. I was having dinner with my wife and this guy walks in and loudly proclaims: " I think all insurance agents are crooks". A man quickly rushes up to the guy and shouts "You take that back!" The guy replies, "Why? ... are you an insurance agent?", the man, in a rage, hollers back, "No, I'm a crook".

"WAR" Against Overdraft Fees is Brewing.

I don't mean to nag, but even Wall Street is becoming concerned about the effect on bank earnings due to changes in overdraft fee regulation. An article that appeared in the July 25th Wall Street Journal indicated that 54% of TCF Bank's noninterest income is from "service charges" (read NSF fees) and that "TCF should let shareholders know the likely impact on earnings". Take a minute to calculate the potential impact of reduced overdraft fees on your bottom line. Please check with your doctor before doing this exercise, a high stress level is a likely outcome. Something like 90% of all credit unions would be in the red without fee income.

As I mentioned in my July 1st blog post, Congress has asked the Fed to restrict NSF fees, and according the the Journal, the Fed is responding. As we all know, when the APR on an NSF fee relative to the amount overdrawn is calculated, it can be astronomical. Politicians aren't turning a blind eye to overdraft fees any longer, and the Feds have proven that they can move fast when implementing new Regs. In addition, battling "unfair" fees is exactly what the President's new Consumer Financial Protection Agency is being set up to do.

A two-fold action plan: 1. Get your state League and lawmakers involved in the issue. Let them know that reduced overdraft fees will lead to higher fees on other services, lower rates on savings, and higher borrowing costs. 2. Be prepared to find ways to make up the lost fee income. The Fee War is coming, be prepared for the battle.

A Soapbox Moment . . . a little self-regulation might be in order. Yes, members can benefit from Courtesy Pay if used properly. No, we shouldn't "mother" our members, they should be allowed to make their own financial decisions. But let's be honest, some of our less-fortunate members can get themselves in trouble with Courtesy Pay and may be too embarrassed to ask for help . Not everything that is legally permissible is ethical.

Got a Minute? How About 52?

So, I'm making my adjustments to Northern Michigan living, and I can assure you that this is beautiful country. If you have never been "up north", it would definitely be worth a trip. When the trees change colors in the Fall, it's an amazing sight to behold. After mentioning the lack of variety of radio stations in these parts, my AVP said to me "what do you mean?, we have both kinds of music . . . Country AND Western". However, I like more of a variety.

That little story was just a convoluted way of trying to deny that I'm just a nerd that listens to NPR radio. On my long commute up, I ran across an interview with author and educator Parker Palmer on NPR. The 70 year-old wise-man spoke to how the economic downturn is changing, for the better, the way people interact with each other and how many business managers, CEOS, and others are realizing that conducting their lives and businesses in an ethical manner pays off in the long run. It definitely applys to the credit union movement philosophy. And it's "chock-full" of great insight on life.

The interview is found on their "Speaking of Faith" segment, but is more secular in nature. If you have an uninterrupted hour to yourself, it's definitely worth a listen. Here's the link http://speakingoffaith.publicradio.org/programs/2009/rv-palmer/

Banks Introduce 75-Cent Surcharge For Using Word 'Bank'

Executives from the nation's 50 largest banks announced Monday that, effective July 1, all customers will be assessed a 75-cent surcharge each time they use the word "bank." "Now, each time a customer uses the word 'bank' in either its spoken or written form, 75 cents will be automatically deducted from his or her account," said Kenneth Nordland, 54, president of the American Banking Association. "For instance, if you say, 'I bank with Bank of America,' that would cost you $1.50." Nordland added that customers wishing to avoid the penalty are encouraged to use the alternate phrase "financial institution."

Just kidding.

^TNX Creep. Interest Rate Chronicles

Ok, so Fed Chairman Bernake said that the Feds will be leaving the Fed Funds Rate alone until the unemployment situation starts to improve. Unfortunately, that doesn't appear to be ready to happen anytime soon. And unlike his predecessor, Alan Greenspan, there is infinitely more openness about what the Feds will be doing with the rate. This kind of takes out all the fun of trying to guess what the Federal Reserve is up to.

But, we still have the bond market to concern ourselves with, and because mortgage rates move with the ten-year bond rates (symbol ^TNX), it's definitely worth our time to watch the direction the bond market moves. As investors become more confident about the market, they can stomach a bit more risk, hence a move out of the safe and loving arms of U.S. Treasuries and into other investments. The reduced demand effectively causes treasury rates to move higher. As of this writing, the ten-year is creeping upward towards a 52 week high. Take a look at the Yahoo Finance chart for TNX, you will see where we are headed.
http://finance.yahoo.com/echarts?s=%5ETNX#chart1:symbol=^tnx;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

You might want to purchase some video games for your mortgage department - if rate go too much higher, refinances might dry up and they'll have nothing to do all day.

Regulation B. Equal Credit Opportunity Act.

RISK LEVEL = HIGH

Purpose: to promote the availability of credit and prohibit discrimination to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (protected class). Also to notify members of approval or denial of their application; to report credit history in the names of both spouses on an account; to collect information about the applicant's race and other personal characteristics in applications for certain dwelling-related loans; and to provide copies of appraisal reports if requested.

Regulators mainly look for two types of discrimination. 1.Discrimination against an individual. We are all familiar with this type of discrimination and should know the repercussions, and 2.Disparate Impact or practices that have the effect of discrimination against a protected class. There is considerable risk to the credit union because under Disparate Impact, proof of discriminatory motive is not required. For example, let's say an examiner reviews your loan portfolio and finds that the percentage of loans to minorities is lower than that of the percentage of minorities in your field of membership. Did you know this? You should, and you should take action to rectify the situation.

An examiner is required to report incidences of discrimination to the Justice Department. Can I state the obvious? You don't want this.

Recommendation: conduct your own "due diligence". Download your loan (especially mortgages) demographic information and analyze the info. If you can show that you have taken steps to determine whether or not your portfolio may have a Disparate Impact against a protected group, and have taken action to attempt to rectify the matter, you could save not only monetary penalties, but reduce reputation risk as well.

The entire Reg can be found at: http://www.fdic.gov/regulations/laws/rules/6500-2900.html Have fun with that!

An aside on the economy:
"President Obama is going to be working in the broadcast booth during the All-Star Game. Everybody says, 'Oh, that's cute.' But let me tell you something. You know the economy is bad when the President has to take a second gig." --David Letterman

Collections, Colonoscopy. What's the Diff?

It's a fact of life. No one likes to talk about a Colonoscopy or Collections. It just seems too unpleasant. But like that unmentionable medical procedure, it is hard to understate how important a good collection department is to your (fiscal) health. It's no fun, but you should thoroughly review the collection process on a monthly basis. Set up a sub-committee if you don't have the time.

If you have been around the financial industry for any length of time, you know that an effective collections policy and procedure often makes the difference between operating at a profit or a loss. That said, please keep in mind that your collectors are not miracle workers. While collectors are often your unsung heroes, if a loan is bad when you book it, there is little a collector can do to rescue the day.

Some basic effective collection rules: 1. Your telephone is your most effective collection tool - make a courtesy call as early as ten days delinquent. A follow up call AS SOON AS the member misses a "promised payment" is imperative. 2. Be nice and treat people with dignity and respect. Bad things happen to good people and in many cases, your member may just need some coaching to get through difficult times. 3. It's collections 101 that "your first loss is your smallest loss". Be careful when restructuring a loan, if you have to repossess the property at a later date, you could end up with a higher deficiency balance. 4. Do a charge-off "autopsy" on all charged-off loans. Why did the loans end up as a loss? Look for trends by loan officer, lack of collection follow-up, high loan-to-value, liberal loan policies, poor underwriting, etc. The key is to avoid making the same mistakes over and over.

Just a rhetorical question, please do not answer . . . how does one decide that one wants to become a Proctologist? Or a collector for that matter.

Loans are Down. What is it Costing You?

If you are like most credit unions, your total loans outstanding are down from last year (or behind budget this year). But what does that mean in dollars and cents? Here's an easy way to ballpark it. Let's say the spread between your average loan rate and your average deposit rate is four percent (that's about average). Your lost income for each million dollars in reduced loans outstanding is (4% x $1million) $40,000 per year.

So how do you find your credit union's rate spread and loans outstanding? It's all public record. Go to http://www.ncua.gov/DataServices/FindCU.aspx. Search for your CU, click on Financial Performance Report, then ask for a two page FPR report. Your loans outstanding will appear on the Financial Summary Report, and your interest spread will be on the Ratios Report (use "Net Interest Margin/Avg Assets - it'll get you close). June's ratios won't be available for a while, so March will do. Need some help? Just post a comment below, I'll take a look for you.

Is your Interest Margin is lower than your peer group? Unless you are comfortable with your profit margin, or lack thereof, you might want to take a close look at your loan and deposit pricing. Many credit unions are finding that rates just don't matter right now, especially on the deposit side.

Riddle: What did the clueless CEO say to his Board about the credit union's high net worth ratio? CEO: "We'll keep offering the highest deposit rates and lowest loan rates until it's all gone"
OK, it's not quite a riddle that will win a $100 prize from Reader's Digest, but you get the drift.

Mortgage Disclosure Improvement Act Reminder

A reminder: beginning July 30, the Federal Reserve Board's new Mortgage Disclosure Improvement Act (MDIA) goes into effect. The rule will change the way the Truth In Lending Act (TILA) is disclosed to consumers. Your mortgage people should be on top of this by now. More information can be found in an article by Richard Triplett at http://www.allregs.com/ealerts/updates090526_MortgageDisclosureImprovementAct-2MonthsEarly.htm.

Totally unrelated:

"Banks are hurting. I opened a new account, and the lady asked me for a toaster." --Bill Maher

"Good news for GM today. They emerged from bankruptcy and the newly appointed CEO said that the company will now build cars that Americans want. After hearing this, GM employees said, 'You can tell this guy's new around here.'" --Conan O'Brien

Your ALM Software is a Tool.

As you know, interest rates are historically low, and due to the Fed's recent purchases of long-term bonds, some say rates are artificially low. This may skew your Asset Liability Management (ALM) analysis results towards the favorable side, so take caution when putting long-term mortgages or mortgage-related investments on the books. Rates are expected to hold steady through the summer, but can move up quickly once the economy turns around.

There are numerous ALM topics to discuss at your ALCO meetings, but here are a few . . . 1. A three-year income simulation; will net income be recover within a reasonable amount of time in a rising rate environment? 2. What will happen to your Net Worth if rates rise suddenly? 3. Projected repayment speeds on Mortgages will slow if rates go up (who would want to refinance if their rate is lower than the market?) are you in a position to hold mortgages for the longer term?

Your ALM software results can only take you so far. Spend some time reviewing your credit union's unique position in the marketplace and use ALM analysis as a tool to help make decisions regarding which products you will need to focus your marketing efforts on. Don't be afraid to sell to Freddie and Fannie to control the number and types of Mortgage loans you keep on your credit union's books.

Incidentally, if I had a choice, I'd prefer to be called Freddie rather than Fannie, even if I were a girl. But that's just me.

Dern-Near Free Money From the SBA.

Could your Loan Department manager sell an SBA loan product that is interest-free to the borrower, has deferred payments for 12 months, and has no SBA fees associated with them? What if the loan has a five-year payback . . . remember we are talking zero interest here. What if I told you that the loan is 100% guaranteed by the SBA - AND the SBA pays the credit union Prime plus 2% on behalf of the borrower? You'd say "it sounds too good to be true", yes? Oh, but you have wandered into Obama Land where life is wonderful all the time.

It's called America's Recovery Capital (ARC) Loan Program. The ARC loan, which began in June 2009, is meant to help small businesses pay on existing debt and provide temporary financial relief so they can keep their doors open. There is a maximum loan amount of $35,000. What's more . . . non-SBA lenders can become ARC lenders. True story.

This is an excellent time to dip your toe into the business loan ocean. Even if ARC loans are the only business loans you ever make, it's hard to argue that this isn't a product your credit union should seriously consider offering. Not just offer, but SELL! Better hurry, the program runs out in September, 2010 or until funding runs out, which ever comes first.

You can find your nearest SBA district office at www.sba.gov/localresources/index.html.

Obama and the Dems: Shim the Jamb Plumb.

Many of the new regulations that the Obama administration has proposed will begin shifting banks back to the "old" way of doing business, . . . closer to the way credit unions have always done business.

A side note: When I was a kid, my Dad built our family home. A sticker on the new windows read "Shim the Jamb Plumb" when installing. To me it sounded like a bunch of random words; I even thought it might be a joke. Funny stuff! But, it means you should be sure the window is level at the bottom. Hence the above headline. It's more fun to say "shim the jamb plumb" than that old worn-out sports reference, "level the playing field", am I right?.

Proposed banking rule changes include stricter capital requirements (credit union capital requirements are already more strict than bank's) and a requirement to require originators of asset-backed securities to retain at least a 5% interest in securitized loans. This 5% rule should help "keep in check" the "gunslinger" mentality of banks who made risky loans only to dump them off their balance sheet. Also, due to a FASB rule, banks may soon have to bring billions of these loans, currently held in subsidiary companies, back on to their balance sheet. This and the 5% requirement may have the effect of leveling the playing field (sorry, old habits) by allowing for fewer loans to be booked while still staying within capital limits.

What does all of this mean to the credit union industry? Once the economy begins to heat-up and turn around, credit unions may be in a position to grab some market share back from the banks in our historical "niche", consumer loans. Start forming (improving) great relationships with reputable auto dealers and realtors in your market, it just may pay off in the long run.

Interest Rate Chonicles. Treasury Auction Watch.

So you love these low interest rates? Great news, then! The economy continues to suffer and last week's data showed the U.S. economy lost almost half a million jobs in June, as a result, it is widely expected that the Federal Reserve will keep interest rates near zero for some time. I hope you're happy.

Interest rates on short-term Treasury bills fell in Monday's auction (july 7th,2009). The rate on six-month bills dropped to the lowest level since late December, while three-month bills also dipped. Rates had been climbing due to increased confidence in the economy.

There also will be a $19 billion 10-year bond sale on Wednesday and an $11 billion 30-year auction on Thursday. As discussed in our June 18th, 2009 blog, mortgage rates closely follow the 10-year bond rates. Want to predict the future? Impress your friends? If the 10-year demand is low, rates will move up and mortgage rates will likely follow and vice versa. The chart that demonstrates this trend is worth a second mention and can be found at http://www.hsh.com/images/forgetfed.gif.

Amendments to Regulation D - The Forgotten Regulation

I was reading the recent amendments to Reg D (Reserve Requirements of Depository Insititutions) the other day and I heard this thump!. It took me a second to realize that it was my head hitting the desk. It's not a particularly interesting Regulation, even by Regulation standards. Nonetheless, there are a couple of minor changes that will affect you.

About the Reg: Reg D seems to be a grab-bag kind of regulation. When someone comes up with a rule that doesn't fit nicely into another Reg, someone says - "just give it to Reg D, he doesn't have much to do". The Feds use the reporting requirements of Reg D to track the money supply, it details some restrictions related the sale of securities, sets the amount of money fiancial institutions must set aside (reserve requirements), and restricts the number and types of transfers and withdrawals from savings accounts.

Here's a Trivia Question: What makes a savings account different from a demand (checking) account? Both can pay interest, and both can be accessed with a check, debit card, etc. So how are they different? I'll bet your CEO doesn't know the answer - just for fun, ask him.

The answer appears right here -> While normally you allow your members to withdraw money upon demand from their savings account, by regulation you must reserve the right to require a seven day notice for a withdrawal from savings (it should be in your disclosure). Money in a checking account must be made available on demand. Also, the types and number of withdrawals that may be made from a savings account is limited. This is where one of the new Reg D revisions come into play: the final amendment increased from three to six the number of third party transfers or withdrawals that can be made from a savings account each month. Six, wow, six. Other amendments include interest on "excess balance deposits" held a Federal Reserve Banks.

What about reserve requirements? Chances are, you have enough cash in your vault to satisfy the requirement. All credit unions are required to file a periodic Reg D 2900 report that helps you determine your reserve requirement. Hey, what was that thud?

Here is a link to the revisions: http://www.federalreserve.gov/newsevents/press/monetary/20090520b.htm

The End of Courtesy Pay as We Know It?

On May 27th, 2009, three influential members of congress wrote a letter to Ben Bernanke requesting that the Federal Reserve "immediately address manipulative clearing practices" related to overdraft fees. Consider this: Today, President Obama sent Congress a bill that would create the Consumer Financial Protection Agency, which he said would better protect Americans from unscrupulous practices. And NSF fees are in the cross hairs.

Not too worried about it? Most credit unions would be in the red without fee income, and quite often Courtesy Pay and NSF fees provide the lion's-share of non-interest income. There is some talk of disclosing fees as a finance charge - this would mean you can no longer charge, say, $25.00 on a $50.00 transaction. Take a look - how would your income statement be impacted if you lost 10%, 20%, 50% or more of your NSF fee income? You might be surprised. A contingency plan may be in order.

My guess? SOME kind of "consumer protection" is inevitable related to NSF fees. Probably an "Opt In" requirement as well as restrictions on "series of fees" (fees caused by fees). But you might not want to go with my guess . . . I had some serious money on Hillary.

Here's the link to the letter. Read it and weep. http://www.federalreserve.gov/SECRS/2009/June/20090604/R-1343/R-1343_060209_21124_293484117638_1.pdf

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.