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Diversity discussion slated for NCUA meeting

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ALEXANDRIA, Va. (3/12/12)—Technical changes and the agency's diversity and inclusion strategic plan will lead the day at the National Credit Union Administration's (NCUA) March 15 open board meeting.

The technical changes will be addressed in a final rule on Parts 701, 760 and 790 of the NCUA's Rules and Regulations. Part 701 of NCUA regulations addresses federal credit union organization and operations, and Part 760 applies to loans in special flood hazard areas. Part 790 covers requests for NCUA action.

The agenda did not give many details on the diversity and inclusion plan discussion, but the NCUA in its strategic plan for the years 2011-2016 highlighted increased diversity as one of many goals it hoped to address. The agency earlier this year established the Office of Minority and Women Inclusion, an office that will, among other things, address issues related to diversity in management, employment, and business activities.

Quarterly reports on the status of the National Credit Union Share Insurance Fund and the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) will also be presented during the meeting. The agency last year said it would scale back the once-per-month reports to a quarterly basis, citing the increasing stability of the credit union system.

This will be the second NCUA open board meeting of 2012. The agency cancelled its February board meeting.

A creditor claim appeal and supervisory activities are on the closed board meeting agenda. The closed meeting will follow the open board meeting, which is scheduled to begin at 10:00 a.m. ET.

FHFA decreasing Fannie Freddie exec pay

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WASHINGTON (3/12/12)--The Federal Housing Finance Agency (FHFA) last week said it will reduce executive pay at government sponsored enterprises Fannie Mae and Freddie Mac by 75% when compared to their pre-conservatorship levels, eliminate bonuses, and establish a pay target of $500,000 for newly hired CEOs.

Freddie Mac CEO Charles Haldeman and Fannie Mae CEO Michael Williams plan to depart once their replacements have been identified. Both CEOs could earn as much as $5.4 million in compensation this year.

FHFA Acting Director Edward DeMarco said the new compensation program "strikes the balance between prudent executive pay" and protecting taxpayers. DeMarco said more drastic cuts could create safety and soundness concerns.

The FHFA also released a 2012 Conservatorship Scorecard, which will track the FHFA's progress as it works to build a new infrastructure for the secondary mortgage market, gradually contract Fannie Mae and Freddie Mac's dominant presence in the marketplace while simplifying and shrinking their operations, and maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

The Obama administration is considering a range of options for mortgage market reform, including almost completely privatizing the housing finance system, limiting the government's intervention in the mortgage market to times of financial distress, and using a system of reinsurance to backstop private mortgage guarantors to a targeted range of mortgages. Administration officials have said that each of these proposals would shrink the government's role in the mortgage market.

For the full FHFA release, use the resource link.

CUNA strongly supports Senate exam improvements bill

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WASHINGTON (3/12/12)--S. 2160, the Financial Institution Examination Fairness and Reform Act would enhance safety and soundness by increasing the consistency and fairness of the examionation system and would in no way weaken the federal examination system, the Credit Union National Association (CUNA) said in a letter to Congress last week.

The letter was sent to bill co-sponsors Sen. Jerry Moran (R-Kan.) and Sen. Joe Manchin (D-W. Va.) following the introduction of the bill last week. CUNA expressed itsstrong support of the legislation, thanked the legislators for their leadership, and encouraged them to consider additional enhancements to S. 2160 as the bill moves through the legislative process.

The bill would establish a new inter-agency ombudsman to investigate complaints about examinations and look at examination quality assurance, require regulators to provide clear and consistent loan treatment guidelines, and prevent regulators from retaliating against institutions that challenge their determinations.

The legislation is similar to the Financial Institutions Examination Fairness and Reform Act (H.R. 3461), which was introduced in the House last November.

CUNA has praised both bills as firm steps in the right direction "toward ensuring the federal financial institution regulatory agencies conduct fair exams, which are consistent with the law and regulation and ensure safety and soundness."

H.R. 3461, which is co-sponsored by House Financial Services subcommittee on financial institutions chair Rep. Shelly Moore Capito (R-W.Va.) and ranking member Rep. Carolyn Maloney (D-N.Y.), has 107 cosponsors.

CUNA continues push for MBLs in Senate

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WASHINGTON (3/12/12)--A Wall Street Journal story last Friday took note of credit unions' push for member business lending (MBL) legislation on the Senate side of Capitol Hill, and the Credit Union National Association (CUNA) continues to call on legislators to take MBL action.

CUNA and credit union efforts are focused on the Senate, and working with legislators to add MBL language to an upcoming Senate jobs bill. CUNA and credit union leagues have encouraged supporters to contact their legislators through a credit union action call, notes Ryan Donovan, CUNA senior vice president of legislative affairs. 

The U.S. House last week passed the Jumpstart Our Business Startups (JOBS) Act, and while MBL legislation was not a part of that final bill, Donovan explained that the structure of that House jobs bill prevented legislators from adding many amendments. CUNA, credit union leagues and credit unions continue to press in the Senate.

S. 509, which would increase the MBL cap from 12.25% to 27.5% of assets, remains active in the Senate, and has 22 cosponsors. A similar bill, H.R. 1418, has 122 cosponsors.

CUNA has estimated that increasing the MBL cap to 27.5% of assets would inject $13 billion in new funds into the economy, creating as many as 140,000 new jobs, at no cost to taxpayers.

Also on the MBL front, and in light of passage of the House jobs bill,  the Progressive  Policy Institute (PPI) is recirculating  to federal lawmakers  its December paper entitled "The Credit Gap: Easing the Squeeze on the Smallest Businesses,"  which backs  an MBL increase as a bipartisan plan that could enhance any jobs bills.

To join CUNA's MBL call to action, use the resource link.

NCUA outlines elements of effective MBL program

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ALEXANDRIA, Va. (3/12/12)--Member demand has sparked an increase in the number of credit unions offering member business loans (MBL) and by the end of 2011 federally insured credit unions had a combined MBL portfolio of $39.1 billion, the National Credit Union Administration (NCUA) noted in its monthly NCUA Report.

That total portfolio represents an MBL jump of more than 5% for the year, the agency monthly newsletter noted in an article that went on to outline areas that need specific attention when offering an MBL program. In part, the article said:

  • Mission statement: The mission statement of new MBL programs should reflect a desire for a well-diversified portfolio of borrowers with proven cash flows, in low-risk industries.
  • Personnel and Compensation: Credit union personnel with approval authority over MBLs should have adequate credit administration and underwriting experience. Relationships, sales, and business development experience does not count. Incentives should be tied to credit quality as much as it is to volume
  • Third-Party Originator: Credit unions looking to boost loan volume often look to outside third-party underwriters to analyze loans. The credit union must review the third-party underwriting, confirm all analyses, and reach an independent conclusion about whether the proposed loans match credit union policy and risk appetite
  • Underwriting: The underwriting document or credit presentation should capture all pertinent aspects of an MBL. The credit presentation for a commercial loan should include the following analysis: sources and uses of funds; existing and projected cash flow; leverage and liquidity; and, secondary sources of repayment to include collateral and guarantor support. Other elements include: financial reporting and credit monitoring requirements; required adherence with financial covenants; risks and mitigating factors; and, a risk-rating justification for the proposed credit structure. Risk
  • Rating Justification: While many credit unions earn high marks for properly analyzing borrowers, there are also many who assign risk ratings by using a subjective or arbitrary methodology. The outcome is a mismatch between the assigned risk ratings and concerns identified within the credit presentation. The credit union's MBL policy should clearly articulate credit characteristics specific to each risk rating category, and include tangible metrics (cash flow coverage, leverage and liquidity) and corresponding thresholds for these categories.
  •  Financial Reporting and Portfolio: Monitoring the underwriting, approval, and disbursement processes represent the first steps for administrating an MBL loan. Credit unions need to clearly identify within the credit presentation (and loan documentation) the frequency and quality of financial reporting as a function of risk rating, credit exposure, and borrower sophistication. Employees need to follow through with obtaining and analyzing updated financial information on a timely basis and maintain a tickler system for following up on outstanding financials. This is particularly critical with purchased participations where the credit union does not have ready access to the borrower.
  • Financial Covenants: The purpose of financial covenants is to provide an expectation for commercial borrowers to operate within a financial framework that does not expose the lender to excessive risk. Breach of a financial covenant provides an early warning to the lender and the ability to call a loan into default. As credit unions bring in sophisticated commercial borrowers, they should look to protect themselves via cash flow, leverage and liquidity covenants.
  • Due Diligence on Collateral: Credit unions need to complete adequate due diligence on collateral securing loans through inspection, commercial appraisal, environmental assessment, or other method to confirm valuation and salability of collateral should the need occur. The extent of due diligence is a function of credit exposure, collateral type, and likelihood that collateral will need to be relied upon. The advance rates on collateral should be a function of the secondary market for securing collateral.
  • Cash Is King: A fundamental difference between a financial institution and an asset-based lender is the expectation and requirement that an MBL will be repaid with cash generated from operations, rather than secondary sources of repayment like collateral liquidation or a call on guarantors. With the possible exception of unencumbered guarantor liquidity and readily marketable securities serving as collateral, there are few alternatives to proven cash flow. Cash flow coverage (also known as debt-service coverage) is usually calculated as the annualized sum of net income, interest expense, and non-cash expenses divided by the sum of existing and proposed principal and interest payments for the applicable year.
  • Portfolio Controls: Credit unions with new MBL departments are often pressured to generate sufficient volume to justify the initial investment in MBL personnel and infrastructure. However, absent experience in administrating these loans, a rapidly growing MBL portfolio has the potential to alter the credit risk profile of a credit union. Management needs to carefully choose the initial MBLs to build their portfolio while reasonable growth targets should be set.

Use the resource link below to click through to the NCUA Report and read what the article describes as "bad signs" in each program category.

Inside Washington (03/09/2012)

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  • WASHINGTON (3/12/12)--The Senate Thursday passed an amendment to combat offshore tax havens and help reduce the deficit. The amendment, which the Senate adopted as part of the surface transportation bill now under consideration, will allow the Treasury Department to implement a range of measures against foreign governments and financial institutions that significantly impede U.S. tax enforcement. Under Section 311 of the Patriot Act, the Treasury Department can take measures against foreign governments or financial institutions that engage in money laundering. The amendment, sponsored by Sens. Carl Levin (D-Mich.), Kent Conrad (D-N.D.) and Sheldon Whitehouse (D-R.I.) gives Treasury the same tools to combat foreign governments or financial institutions that impede U.S. tax enforcement. For example, Treasury could prohibit U.S. banks from accepting wire transfers or honoring credit cards from banks found to have significantly hampered U.S. tax enforcement efforts …
  • WASHINGTON (3/12/12)--The House on Thursday passed legislation that eases regulations on small businesses and makes capital formation easier. The Jumpstart Our Business Startups, or JOBS, Act passed 390 to 23 (American Banker March 9). The bill contained a measure that allows small community banks to grow and raise capital without submitting to costly Securities and Exchange Commission regulations. House Majority Leader Eric Cantor (R-Va.) called for the Senate to pass the House bill as it is. The JOBS Act will get small businesses and entrepreneurs back in the game by removing costly regulations and making it easier for them to access capital," Cantor said. "This legislation also paves the way for more startups and small businesses to go public, which will attract new investors and allow the small businesses to grow and create jobs" …
  • WASHINGTON (3/12/12)--A group of business associations, including the U.S. Chamber of Commerce, sent a letter Thursday requesting regulators to hold a hearing on plans to designate non-bank financial institutions as systemically important (American Banker March 9). Those firms would be supervised by the Federal Reserve Board under criteria described in the Dodd-Frank Act. Among the factors to be considered are size, interconnectedness and complexity. In the letter, organizations such as the American Council of Life Insurers, Business Roundtable and Competitive Enterprise Institutes said they have a number of concerns to address that were raised in previous comment letters. A public comment period ended Dec. 19 …
  • WASHINGTON (3/12/12)--The Consumer Financial Protection Bureau (CFPB) has issued Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) exam procedures, and while CFPB examiners will not oversee the majority of credit unions, the Credit Union National Association has suggested that all credit unions that offer mortgage loans review the procedures. The interagency procedures lay out the background and requirements of the SAFE Act and Regulation G concerning federal registration. The SAFE Act procedures will serve as a guide for CFPB examiners to use in overseeing depository institutions with more than $10 billion in assets and their affiliates, and non-depository consumer financial service companies…