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CEO's Corner The Credit Card Act and it's Impact on ConsumersNovember 2009 The Credit Card Act was signed into law in June of this year by President Obama. The law was enacted in order to provide consumers protection from what were perceived to be predatory practices by some credit card issuers. For the most part we support this legislation, although it has had some inconvenient, unintended consequences for us.
First Alliance Credit Union has two credit card products branded through MasterCard, a Platinum card and a Standard card. It has historically had what the industry called a fixed rate. In the past a rate was considered fixed if it did not fluctuate automatically in correspondence with an outside index. However, the rate wasn’t truly “fixed” in the sense that it was never permanent. With 30 days written notice we could increase or decrease the rate at anytime. While we rarely adjusted this rate we did retain the right to do so which is an important protection against large unexpected increases in market rates.
Under the Credit Card Act we will now have to classify our rate as “variable” in order to preserve our right to change rates if market circumstances warrant. We will be sending out a notification of this change to card holders shortly. The rates will not change, they will remain at 6.95% APR and 8.95% APR respectively. However, they will be tied to changes in the prime rate. When the prime interest rate changes our credit card rate will change with it.
I am writing about these changes in Kelly’s Korner because of the many reports in the news and anecdotes from members about how other credit card issuers are modifying their programs in advance of the Credit Card Act implementation dates. We have had “A” borrower’s (borrower’s with excellent credit) report their rates from Citibank have increased from 8.9% to 39%!! Wells Fargo rates have been reported as high as 29%. Late payment fees are $39 and over limit fees the same. So, we were motivated to do a little research and here is what we found with respect to credit card fees:
* Return payments put account into default interest rate. ** Results in additional interest and possible over limit fees.
****Survey data collected as of 11/13/2009, obtained from each financial institution’s website. Contact each institution for most current fees and information.*****
I have included this research in my report this month because I think it is instructive about the difference between for-profit banks and not-for-profit credit unions. Banks inherently have a conflict of interest between the needs of their customers and the needs of their shareholders. Credit Unions have no such conflict. While we have to assess charges to cover the costs of exception transactions or to cover the costs of the programs, we don’t have to “profit” from those transactions. So, we are happy with our 6.95% APR and 8.95% APR credit card programs and our more modest fees and will not be increasing them in advance of the implementation of the Credit Card Act.
So, transfer your balances from your bank cards and tell your friends and family, First Alliance Credit Union has $20 million to lend and no balance transfer fees.
Other Credit Union News-Regulations! Regulations! Regulations!October 2009 As a result of last year’s financial meltdown in the banking sector new regulations are coming fast and furious from Washington. Sadly, there haven’t been any yet that address the risky practices of investment banks that caused this mess. But, there are a number of efforts aimed at protecting consumers from the predatory practices of mortgage lenders and credit card companies.
The most significant to date is the Credit Card Act. It impacts us in a number of ways. It implements protections for college students and young adults. Many college students are approached on campus with appealing credit card solicitations without understanding the full financial implications of buying on credit. The new law will require that anyone under the age of 21 has a co-signer to obtain a credit card. The law also puts into place some restrictions on fees, extends the grace period for payments and regulates how interest rates can be changed on credit cards. Additional disclosures will be required. We didn’t have any “prohibited” practices that required changes to our program, however, there are some “unintended consequences” that we will have to make provisions for.
There are additional changes to Regulation Z which governs mortgage lending. I’ll talk about them next time! Updated Information-Corporate Stabilization EffortsSeptember 2009 Wow! Time has gotten away from me and I haven’t kept up-to-date with my posts. I’ll make a better effort going forward. We have lots of news to share! In late June the National Credit Union Administration (NCUA) announced some relief from the charges that they imposed in the first part of the year. We were able to record a recovery of some $525,163 of the NCUA related charges due to the creation of this Temporary Corporate Credit Union Stabilization Fund. However, we will still be responsible for a premium adjustment of $129,636 in the fall. And, we should remember that while the NCUA has given us some relief this year, that $525,163 of losses will have to be paid for someday, this new method simply lets us pay for this over a longer period of time. The long awaited audited financial statements from US Central Corporate Federal Credit Union were released this month. As expected, the losses that they will pass down to Member’s United Corporate Federal Credit Union are sufficient to fully eliminate our paid-in-capital of $67,462. In addition, our share in that credit union is impaired to the extent of $326,037 for a total loss to date of $393,499. Both of these losses are being recorded in September. There is no help waiting in the wings to relieve us of these losses. And, these losses only reflect those incurred through December 31, 2008. Additional losses have been incurred in 2009 that will eventually be pushed down to us. Also, Member’s United’s audited financial statements have not been released and when they are there may be additional charges. While bottom line results don’t reflect it because of these extraordinary charges we have actually had a reasonably strong third quarter with moderating loan losses and net earnings for most months. We’ll continue to control discretionary expenses to the extent that we can without adversely impacting member services. More Information -Corporate Stabilization EffortsJune 2009 In May the President signed the Helping Families Save Their Homes Act into law. It contained several provisions which are of interest to credit unions. First, it extends the temporary increase of deposit insurance to 2013. This means that credit union deposits are insured up to $250,000 until the end of 2013. This higher insurance limit has been in place since early this year but was originally set to expire at the end of 2010. Secondly, it establishes a Temporary Corporate Credit Union Stabilization Fund. This will allow the NCUA to transfer the costs of its stabilization efforts from the National Credit Union Share Insurance Fund to the new Stabilization Fund. This will enable the industry to pay the costs associated with stabilization over 7 years rather than over one year. This act increased the NCUA’s borrowing authority to $6 billion. It immediately borrowed $1 billion of this total to continue its efforts to shore up the corporate credit union system. The stabilization fund will also allow the NCUA to reduce its share insurance premium to natural person credit unions by 50%. We expected to be assessed $228,332 in September. Now our expense is estimated to be $114,166. It may also allow us to recover the $525,163 which was charged to earnings in February and March. Because the losses are now being bourn by the Temporary Corporate Credit Union Stabilization Fund we may be able to adjust for the losses previously posted to the National Credit Union Share Insurance Fund. This would free up credit union earnings nationwide allowing those earnings to be used to recapitalize the share insurance fund. Accounting guidance is expected to be forthcoming from the NCUA this week. Finally, we are still waiting on the audit reports for US Central Corporate Federal Credit Union and Members United Corporate Federal Credit Union. Until those audit reports are finalized we cannot determine the extent to which our share in Members United has been impaired. We continue to expect that it will fall between $67,462 and $286,442. We will make this adjustment as soon as these reports are finalized. Important Information-Corporate Stabilization EffortsMay 2009 Clearly, based on my last two posts, events in the corporate credit union industry are having a significant impact on First Alliance Credit Union. Our losses are up to $1,039,937 and are not likely to be over. Furthermore, our own loan losses are mounting due to increased delinquencies and a record number of bankruptcies. We have added $381,000 to our provision for loan losses in just the last five months. What does all of this finally mean? First Alliance Credit Union has built up reserves over its 75 year history of over $12 million. Our capital at the beginning of 2009 was $12,364,305. Even after consideration of internal losses and these enormous externally imposed losses we have capital reserves of $11,544,025. Our net worth ratio is 11.23% still significantly above the 7% threshold that the NCUA considers “well capitalized.” We are certainly disheartened by these events over which we have no control but it is mingled with an element of pride in our industry for tending to its own woes without looking to the government or the American taxpayers for a handout. We are beginning to see signs that the economy is recovering and are optimistic about its ability to do so. But realistically I think as a country and as an industry we will suffer more pain before we have fully recovered. The management team submitted a revised budget to your Board of Directors at its April meeting. We are prepared to meet the challenges imposed upon and move our business forward in spite of these obstacles. I’ll keep you posted as developments in the industry continue to unfold. Please feel free to call me, at any time, with your questions or concerns. Or, send me an email to kmcdonough@firstalliancecu.com. Important Information-Credit Union IndustryMay 2009 As mentioned in previous posts, there are two types of credit unions: natural person or retail credit unions like First Alliance and corporate credit unions which are wholesale funding sources for natural person credit unions. First Alliance Credit Union is a member is Member’s United Corporate Federal Credit Union based in Warrenville, Illinois. During this “Corporate Stabilization” effort, the NCUA has guaranteed all natural person deposits at corporate credit unions except for membership shares and paid-in-capital. Just as you, as a member, have to have a member share account in order to take advantage of our products and services, we as a natural person credit union have to have a membership share in our corporate credit union in order for us to take advantage of their products and services. Membership in First Alliance Credit Union is a $25 share. Membership in a corporate credit is based on a formula determined by our total assets and is adjusted semi-annually. Our current share in Member’s United Corporate Federal Credit Union is $811,038. We also have a small amount of paid-in-capital at Member’s United amounting to $67,462. Since the corporate credit unions deal in open securities markets, many have been affected by their investments in mortgage-backed securities. While the majority of these assets are performing, fair accounting rules require that market value losses be recognized, especially as it affects the required capital of the corporate credit unions. These losses are the most significant factor in the NCUA’s decision on March 19 to put US Central and Wescorp into conservatorship. The action of putting these two large corporate credit union’s into conservatorship has further impacted our corporate credit union, Member’s United because they held substantial shares and paid-in-capital in US Central. Member’s United has calculated that their losses in mortgage-backed securities and in US Central exceed their retained earnings and paid-in-capital and have impaired member shares. The exact extent of that impairment has yet to be determined and the NCUA and the accounting industry have not reached consensus on accounting treatment of these losses. Conservatively, our paid-in-capital in Member’s United is now worthless representing a loss to First Alliance Credit Union of $67,462. In addition, our share in Member’s United is impaired by at least 27% or $218,980. Our total loss is presently estimated to be $286,442. We will likely be making this adjustment in May but are waiting on instructions from the NCUA as to how this should be handled. Important Information-Credit Union IndustryApril 2009 On March 19, 2009 the NCUA Board took control of two Corporate Credit Unions, U.S. Central Federal Credit Union and Western Corporate Federal Credit Union and placed them into conservatorship providing NCUA with full control of the current and future operations of both entities.
These actions were designed to: 1) Protect natural person credit union deposits 2) Protect the interests of the National Credit Union Share Insurance Fund (NCUSIF) which protects member deposits in credit unions; and 3) Remove any impediments to the agency’s ability to take appropriate mitigating actions that may be necessary. First Alliance Credit Union is not a member of US Central or Wescorp.First Alliance Credit Union also received an invoice dated 3/6/09 from the NCUA bringing our NCUA deposit in the NCUSIF up by $90,766 reflecting increased insured shares as of 12/31/08. This is a normal, routine event which occurs twice a year. Thus, our NCUSIF deposit increased from $670,339 to $761,105. Based on the above actions First Alliance Credit Union needs to write down its investment in the NCUSIF by an additional 18% bringing our total impairment from 51% effective in January 2009 to 69% effective in March 2009. The increase amounts to $183,289 which was adjusted in March. Our total costs to-date of this “bailout” of corporate credit unions is $753,495. We have separately identified this charge to earnings on our financial statements. Getting the Right Foreclosure Prevention HelpMarch 31, 2009 Here is a great article from CNN Money regarding mortgage foreclosure prevention. Click here to view the article. Important Information: Credit Union IndustryMarch 13, 2009
On Wednesday, January 28, 2009 the National Credit Union Administration (NCUA), our federal regulator, announced actions to support the 28 “corporate” credit unions that are facing strains on liquidity due to the current economic climate. “Corporate” credit unions are owned by “natural person” credit unions, such as First Alliance, and they provide financing, check-clearing and other payment services. Since the corporate credit unions deal in open securities markets, many have obviously been affected by their investments in mortgage-backed securities. While the majority of these assets are performing, fair accounting rules require that market value losses be recognized, especially as it affects the required capital of the corporate credit unions. The NCUA has made a decision to strengthen the capital position and generally restructure the corporate credit union system in a couple of ways: 1) immediately inject $1 billion in the form of a capital note, providing reserves to offset anticipated losses; 2) reserve another $3.7 billion against possible future losses; and 3) assess all federally insured credit unions (like First Alliance) with the cost of these payments. The cost to First Alliance of this “bailout” of corporate credit unions will be $570,000 and it will be recorded as an expense item in January 2009. Our financial statement format will be modified to separately identify this charge to earnings. The management team is in the process of revising its budget and will forward recommendations to the board at our April meeting. We are confident that we can curtail unnecessary expenses and reduce discretionary spending to offset this assessment. Therefore, we will continue to provide the high quality service and competitive rates that you expect and deserve. Our capital ratio before this NCUA decision was 12.56% (NCUA’s definition of well-capitalized is 7%) and following the adjustment, it is 11.89%. Our reserves are still strong enough to weather years of uncertainty, should it be necessary. This is a complex matter to be shared in a letter. For additional information, please continue to visit our website where we have posted press releases, newspaper articles and other relevant links. In closing, we are optimistic about our future, and look forward to strengthening existing relationships with members, as well as developing new ones. We truly value your business and want to assure you that your deposits are fully insured up to $250,000. Our business model of “people helping people” has never been more important.
Card Processor's Breach May be the Largest Yet!January 29, 2009 First Alliance Credit Union has recently notified over 1,000 of our debit card holders and hundreds of our credit card holders that their plastic cards have been compromised and that we are reissuing those cards. And this round of notifications may just be the beginning. Members are frustrated! This may have happened to members more than once in recent years and many members wonder why we are being so careless with their data that it is compromised so frequently! So, why does this happen and what are we doing about it? First Alliance Credit Union makes the security of member data a priority. We have stringent, state-of-the-art safeguards on our computer systems and our communications networks. We do not share member data with outside third parties other than those third parties we use for card processing. This data breach, like the T.J. Maxx major data breach in the summer of 2006, was not caused by First Alliance Credit Union or one of its processors. This data breach occurred at Heartland Payment Systems of Princeton, New Jersey and has possibly compromised more than 100 million plastic cards throughout the country. Heartland provides plastic card processing services for 250,000 business locations nationwide, most of them small businesses. About 40% of the transactions it processes are from small to mid-size restaurants. It also serves community banks, pay-at-the-pump gas stations, school campuses, parking lots and hospitality businesses. It handles more than four billion transactions a year, according to its website. Its systems were breached by a malicious software program ( a”sniffer”) over a period of months extending from May to August of 2008. The company promptly notified authorities, including VISA and MasterCard when it became aware of the compromise. Through VISA and MasterCard card, issuers, like First Alliance Credit Union, were recently notified if their member transactions were among those which might be affected. When we receive such notification and combine that with the knowledge that some compromised card numbers have actually been experiencing fraudulent transactions, we act. We do not wait for our members to experience fraudulent transactions. We prefer, instead, to be proactive and to issue a new card and close the old one. In this way we can prevent our members from further inconvenience and the possibility of having fraudulent transactions occur on their account. We recognize that when this occurs it is inconvenient for our members. However, we are convinced that prompt action on our part now can save both members and First Alliance Credit Union from the possibility of more complicated problems and greater aggravation later. Events like these heighten member insecurities about the safety of plastic card transactions. It is important to remember that cardholders are never responsible for unauthorized fraudulent charges made by third parties. Last year the Minnesota Legislature passed landmark legislation making organizations in Minnesota who are responsible for such data breaches, subject to penalties, media disclosure and reimbursement to card issuers. We will continue to work through our trade associations to get such legislation enacted on a federal level. From my perspective as long as there is no financial or reputation consequence to companies they will not take appropriate safeguards with sensitive data. Meanwhile, organizations like ours bear the cost of cleaning up the data breach mess and inconvenience our loyal members in the process. We will keep you posted about pending legislation. Meanwhile, if you talk to Senator Klobuchar and our, as yet to be determined, second Senator let them know you think plastic card protections need to be passed at the Federal level following Minnesota’s lead. Only then we can hold Heartland Payment Systems to account. KELLY'S PRESENTATION AT THE BUSINESS STRATEGIES EVENTJanuary 27, 2009 Click here for the slide show presentation. NEWS FROM PRESIDENT/CEO
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KELLY MCDONOUGH