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ThE E-cOmmErcE ISSUE may 2014 VOLUmE 9 ISSUE 5 9.95 Lending Tools for a New Generation of homeowner eMortgages by Keith Kelly Credit Unions Keeping Up With Banks for Mobile Banking Services by Roy W. Urrico Products Per Household What Does it Mean to Your Staff by Jack Kelly 2014. SWBC. All rights reserved. 52440-1155 5 14. cONTENTS Credit Union BUsiness may 2014 V O L U m E 9 I S S U E 5 4 6 8 11 14 17 20 24 PUBliSHer S Pov Time to Reflect Tim O Hara CU CoMMent James Collins 27 32 35 38 40 CoMPlianCe UPDate What Flood insurance Reform Means for Credit Unions and Members Michael R. Christians CU training Ken Schroeder at C level The History of Mobile Banking Timeline exeCUtive CoMPenSation The Resilient Credit Union The Company Killers Marc A. Bringman CU SPotlite Sharon Sweda CroSSWorD executive Compensation Finding the Fit For Your Credit Union Alec Berkman lenDing line Products per Household What Does it Mean to Your staff Jack Kelly Cfo CUrrenCY BCU narrows Marketing for Wider impact Prepayment Models Emily Hollis CFA Partner CU Mortgage lenDing Lending Tools for a new Generation of Homeowner eMortgages Keith Kelly CU training Get it for the entire executive team register Ladies and Gentlemen You Are now Presenting Paul Nunn teCHniCallY SPeaKing Credit Unions Keeping Up With Banks for Mobile Banking services Roy W. Urrico May 2014 credit Union BUSINESS 1 aBOUT US Publishing Team Tim O Hara Publisher tim Steve Magnuson Managing editor steve Iliana Nord Operations Manager iliana Patti Manzone Designer Ashok Kumar Circulation Director thE E-CommERCE ISSUE may 2014 volUmE 9 ISSUE 5 9.95 lending tools for a New generation of homeowner eMortgages by Keith Kelly Credit Unions Keeping Up With Banks for Mobile Banking Services by Roy W. Urrico Staff Writers James Collins CU Comment Emily Hollis CFO Currency Paul Nunn CU Training Sharon Sweda CU SpotLite Roy W. Urricho Branching Out Products Per Household What Does it Mean to Your Staff by Jack Kelly Subscriptions Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine inc. A one-year membership costs 89 for print or 69 for Digital. An online membership form is available at register. contributors Alec Berkman Marc A. Bringman Michael R. Christians Jack Kelly Keith Kelly Ken Schroeder Sales and advertising Bernie Fitzgerald Advertising executive Bernie or 561-282-6015 1 Greg Halpern Advertising services Manager Greg or 561-282-6015 4 contact Information Credit Union BUsiness Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim 2 credit Union BUSINESS May 2014 FROM tiM Publisher s POV Time to Reflect Do you remember the dread Y2K it was to have occurred at the turn of the century--the Year 2 000--when the world was supposed to shut down because computer data storage was often abbreviated using a two-digit year instead of four-digit year which meant computers couldn t keep track of time Many people panicked fearing that civilization as we know it would devolve into a state of global chaos. They began stockpiling everything--from cash to water and food to fuel--before the century turned. Y2K came and went uneventfully and a lot of food spoiled. sometimes i think i m losing track of time too. The fact that the year 2000 passed much like any ordinary year isn t as amazing as the fact that it came and went 14 years ago And think about this as a measure of time the iPhone wasn t announced until 2007. Can you remember time before iPhones smart phones apps and mobile banking Doesn t it seem almost unimaginable From a technological vantage point time seems to have flown by. speaking of time flying Credit Union BUsiness is preparing to mark a major milestone too in July we will celebrate 10 years of publishing. We are still the only independent monthly business publication to serve the thriving credit union industry. it has been an eventful decade for credit unions. The great recession had a major impact on our industry bankrupting long established corporations and forever changing the way credit unions do business. And CUB has weathered through too recording and reporting on CU business challenges and successes. We re here to stay. Time has changed a lot about how CUs conduct their business but not CUB s mandate. Our mission is the same today as it was when we launched on July 1st 2005 We bring you important and timely business information to help you operate the most important financial institution in America your credit union. i recently surveyed CUB s past by reviewing the covers of more than 100 monthly issues that are arranged on my office walls. it was like reliving history and it felt pretty good. This latest issue contains the best evidence i can think of to demonstrate how we ve stayed true to our mission by providing you with excellent information written by true industry experts. it includes many of our regular features including CFO Currency written by emily Hollis Partner at ALM First Financial Advisors. Lending Line by Jack Kelly Vice President with Lending solutions Consultants. Compliance Update by Michael Christians from PolicyWorks a leading consultancy. CU Comment by James Collins CeO of O Bee Credit Union. CU Training by Paul nunn CeO of nunn Training. CU Mortgage Lending by Keith Kelly founder and CeO of Mortgage Harmony. This is just a sample of the expert advice that will keep you well informed as you lead the way as your credit union charges into the future. We ll be here for you. Thanks for reading 4 credit Union BUSINESS May 2014 cU cOmmENT The history of Mobile Banking timeline By James Collins A Brief History 1947 AT&T creates the Mobile Telephone service allowing customers to make calls using a simple 79-pound device. Teenagers were not impressed it could not take selfies. 1965 After more than 18 years of work by hundreds of MBA marketing geniuses AT&T renamed their device the improved Mobile Telephone service . Limited to just 40 000 subscribers the system was prone to long wait times and poor service--but that was AT&T s corporate motto so nobody noticed. 1973 Motorola creates the first portable device. Weighing in at just two pounds it was extremely light compared to previous models and was customizable Users could select from a variety of colors. Of course color choice depended on what can of spray paint you had lying around. 1979 1G service was introduced in Japan. Using regular radio waves it was susceptible to snooping by future nsA managers as well as certain high school nerds. 1983 Motorola releases Dynatac 8000X the first commercially available cell phone. At a cost of nearly 4 000 plus service fees it was comparably priced to say the next iPhone. 1991 2G service was introduced to users worldwide with much fanfare. ironically the first cellular contract was also introduced with equal fanfare from lawyers worldwide. 1992 The first text was sent via sMs. it was supposed to read Merry Christmas but the early version of auto spell rearranged 6 credit Union BUSINESS the letters and it read Harry is not with us . This was rather a shock to the recipient ironically named Harry. 1997 Because nokia thought it asinine to press the 1 key three times to type the letter C they introduced the first mobile phone with a keyboard. nokia also installed the first set of apps on a phone--all of which were entirely forgettable except for the game snake a game where you move a snake around the screen chasing food until you run the snake into its tail. it eats itself and ends the game. This was the precursor to a credit union dealing with the nCUA. 1999 While waiting for Y2K (and the end of civilization as we know it) and bored with the horrible Star Wars Episode 1 May 2014 cU cOmmENT We Needed More Money designers in europe created the first mobile banking application. This also happened to be the same time that text messaging was released on a more or less large scale to masses of teenagers who had been waiting for a better way not to communicate with adults. 2008 Apple opened its App store allowing access to specialized apps from a variety of financial institutions with uncensored commentary on each courtesy of the masses. 2009 not to be outdone Android created its own app store. Due to variations in Android devices applications had to support such operating systems as ice Cream sandwich Jelly Bean and Donut leading one to believe that Google is powered by a group of potentially diabetic sugar addicts. Also in 2009 UsAA a large bank catering to the military introduced mobile remote deposit capture which allowed teenagers to deposit grandma s check and spend it within minutes. By 2013 the largest banks also offered this service. 2013 Like slugs stampeding through peanut butter the FFieC begins creating mobile banking guidelines for financial institutions which means that they are only 14 years behind in case you re counting. security concerns are given top priority along with making sure that the hundred or so people still using Motorola s Dynatac 8000X from 1983 are not left out in the cold . HTML5 Many developers are loath to create apps for iOs and the various android operating systems since it has become an enormous logistical challenge to enhance and deploy both. HTML5 a newer way of coding for both mobile and desktop web devices seems to have the potential for breaking the development logjam by reducing deployment time to near zero. Payments Using mobile phones to pay at point of sale has been the focus of several large consortiums including Google Visa MasterCard and many cellular companies. But since they re as comfortable working together as liberal democrats are attending an nRA rally progress has been slow. Mobile banking for all of its warts is here to stay. While some have predicted that this is the channel that will secure the demise of brick and mortar commerce once and for all i think that is unlikely Members look to mobile as just another--albeit very convenient--channel. James Collins is CEO of O Bee Credit Union based in Tumwater Washington. BECOME A CREDIT UNION BUSINESS MEMBER AND WE LL 3-YEAR SEND YOU A FREE KINDLE Sign up for a 3 year DIGITAL subscription What s next so here we are 2014 and the big question is what s next i mean of course besides whatever is coming from the FFieC which will be out of date even before it is written. Here s my list Mobile apps with even more features Think of your mobile app as the ultimate shrunken 1970 s bank branch. All you need now is a slot for cash and you re done. What other lobby-type things will it have Security is paramount if you think that your vendor wrote their app you are most likely wrong. Many use white label apps from third parties and rebrand them. And where were those made nobody knows. and CUB will give you a Kindle Reader to enjoy every issue 69 The LendIng ISSUe november 2013 voLUme 8 ISSUe 11 9.95 x 3 207 The Basics of Managing Interest Rate Risk and the Concept of Duration A Mid-Sized Credit Union Spreads Its Wings Also available in print 89 x3 267 SIGN UP AT how Congressional Federal migrated From Using a mortgage Less than 6 ounces CUSo to offering Fits Full-service Lending in your pocket Holds over 1 000 books Downloads books in 60 seconds with built-in Wi-Fi New darker hand-tuned fonts for easier reading May 2014 credit Union BUSINESS 7 ExEcUTIVE cOmPENSaTION executive Compensation Finding the Fit For your credit Union i By Alec Berkman f the statistics indicating an impending rash of credit union executive retirements are true the demand for qualified and competent successors will grow dramatically. This means that credit union boards will be busy identifying and attracting top-tier talent to run their credit unions. One size does not fit all when it comes to leadership talent and you need to find out if your executive compensation package is an asset or a liability in attracting and or retaining the right executive talent. Alignment of interests Aligning the interests and values of executives with a credit union s business strategies is the key to developing healthy long-term relationships with decision makers who can lead credit unions into the future. Today s credit union is different than it was even ten years ago. The intrinsic homogeneity that once defined the credit union movement is gone. Fields of membership and lines of business are considerably different from what they had been in the past and credit unions now compete with banks other financial institutions and each other. All of these factors along with increased board pressure to maximize efficiency and raise bottom line performance have contributed to a changing culture within credit unions and mandated changes in leadership teams. The credit union now operates in a highly competitive geographic marketplace as well which means there is increasing pressure to invest substantial amounts of money in people marketing systems and product development in order to stay relevant. And that marketplace has grown in area. As fields of membership and seG groups expand a CU s community grows too and now often includes thousands of people spread over several counties and multiple states. in this increasingly competitive environment traditional compensation programs may no longer be sufficient to meet the demands of many credit unions business objectives. The traditional credit union executive pay package remains focused on just two components salary and benefits. There may be additional compensation in the form of short-term bonus and executive perquisites but these elements are not as important as competitive base salary and benefits in the traditional credit union milieu since they tend to operate in relatively lower risk environments don t need to be highly leveraged to be 8 credit Union BUSINESS May 2014 ExEcUTIVE cOmPENSaTION Other Key Components Given that executives tend to wield greater control in more sophisticated and competitive operational environments executive compensation packages are more meaningful when one of the key components includes long-term rewards that are tied to long-term performance. These long-term incentives include deferred compensation plans and supplemental retirement plans. in credit unions long-term incentives are used primarily as retention and reward tools and are typically structured under iRs Code 457 (b) and (f). Credit unions exist in the tax-exempt arena and have few options other than collateral assignment split dollar and restricted bonus plans. 457 plans tend to be the most popular. There are a number of factors to consider when building a compensation delivery system that aligns the people it affects with the direction of the institution. However the most important consideration is making sure that the different compensation objectives of each executive have been incorporated into the total package. Honoring individual values helps shape positive workplace values. Always keep in mind that people are motivated by values and rewarded with compensation. everyone approaches their own value differently even when they share common measurement systems and value sets. An executive benefit program must be appealing to a wide spectrum of employees in terms of attraction retention motivation and reward and you need to make sure that both current and potential executives believe their compensation is competitive fair and meaningful. in the final analysis because each executive and every credit union is different the essential underlying principle of compensation design is to align the specific business objectives strategies and values of the credit union with the needs and values of the individual executive. People are motivated by values and rewarded with compensation. competitive and have members that don t demand a broad array of services that expand the job description of executive staff. Traditional credit unions treat executive compensation in much the same way as compensation for other employees The board of directors offers compensation that is competitive with other credit unions of similar size. The primary compensation objectives of credit union boards that follow a traditional approach to paying incentives are To compensate executives at appropriate levels Provide rewards that are sufficient to attract and retain qualified executives However in order to stay relevant in the marketplace and attract and retain the right people many credit unions now integrate longer-term goal-specific pay for performance incentives tied to sustainable performance goals into their executive pay plans. This type of plan is more prevalent in credit unions that compete for market share with banks and other credit unions and that invest heavily in marketing and people. While investing in people is a risky business all by itself market-oriented credit unions implement business strategies that involve greater risktaking. Their executive compensation plans reflect that risk by basing a higher percentage of the total compensation package on incentive pay. As our industry has both consolidated and grown most large credit union executive compensation plans have changed and now include total cash compensation elements that are leveraged by individual and organizational achievement. A greater percentage of executive compensation is at risk under such plans but they also include provisions with the potential to earn much more. The amount of pay that is leveraged (at risk) should reflect how much control the executive has over the results. A Fair and equitable Approach Participants must believe that compensation is fair and equitable in order for any employment relationship to work well. At the executive level fairness should inform every aspect of the decision making process anytime the board of directors address continuity succession recruitment retention and reward. Of course it is important to understand the difference between equal and equitable. Delivering the same retirement May 2014 credit Union BUSINESS 9 ExEcUTIVE cOmPENSaTION benefit plan to a top executive and a less highly paid employee may be equal but if the executive walks away with a much lower retirement income as a percentage of prior income than his subordinate it certainly isn t equitable. Plus the executive contributes greater institutional value which might argue that fairness should be measured differently. Developing a compensation plan requires some initial research and ideally includes regular information updates and intermittent scans of peer groups the industry and marketplace. But developing your plan properly and keeping your compensation data current will produce results that are well worth your investment. The same performance linkage approach can be used with longer-term plans as well although they will require multiple calendar year cycles to achieve objectives. By creating a program that ties pay to performance the plan contains elements of reward and retention and also links pay to the end objectives of the credit union. This linkage approach is being used with greater frequency by credit union boards of directors to insure that CeO compensation is competitive within the marketplace and is based on the specific performance results that are important to that particular credit union. in the end everybody wins The executive the board and most importantly the members. Alec P. Berkman is the founder Chairman and CEO of Executive Compensation Solutions (ECS). He has consulted nationally on executive benefit planning and specializes in executive compensation retention and retirement programs for credit unions. Over his 40 years with ECS he has been involved with the design implementation and administration of employee and executive benefit plans for over 600 organizations. Alec also works closely with the regulatory agencies that govern credit unions to provide expertise in the regulatory aspects of compensation and benefits. Perception and Reality The simplest approach to salary comparison is looking at compensation paid to others with the same or similar jobs and responsibilities. if your salary does not compare favorably or if you feel that you are not being fairly compensated for the value of your work you can choose between changing how you work or moving to another job or another company. The point is that people do not compare their own job and performance to dissimilar jobs and performance to any job to which they do not aspire or for which they are unlikely to be recruited. To whom should a credit union CeO compare his salary to see if he is being fairly compensated not surprisingly he should look to other credit union CeOs when comparing compensation but even that isn t always reliable. Accurate comparison requires the use of multiple information sources including surveys and peer data as well as compensation it is the only way to get a candid compensation snapshot. it is also important to measure like with like. Credit union CeO compensation should be compared with other peer group credit union CeOs. Asset size is the most important factor to use when determining what credit unions belong in a peer group followed by location number of employees and the complexity of an institution s business plan. Linking Pay to Performance CeO compensation should be tied to a credit union s performance measured against expectations. The CeO as the most senior credit union executive has the most direct impact on credit union results. Linking pay to performance is a fairly straightforward process. Planning should begin before the new plan year starts by developing performance objectives establishing incentive and base pay increase rewards at various result levels scheduling frequent result review sessions throughout the year (at least quarterly) and scheduling a final payment due date. CEO SUBSCRIPTION WiTh BeneFiTs Benefit your CFO COO CMO CCO CLO CIO HRD With Free Monthly E-Newsletters Subscribe NOW register May 2014 10 credit Union BUSINESS LENdING LINE Products per Household What Does it Mean to Your Staff T By Jack Kelly That is a total of 17 basic products and services if we were to count every product and service most Credit Unions would offer somewhere between 50 and 100. so how do CUs end up falling so short in part it s because 1. We don t measure PPH 2. We end up filling orders without looking for additional opportunities 3. new members walk in get their 2.5 PPH and leave. 4. We have not trained staff on all the products and services we offer enabling them to become successful salespeople 5. We don t ask for the business 6. We don t use the products ourselves n 2013 i had an interesting experience at a credit union that well illustrates item four above. i was working with a teller to help her understand how to engage members in product discussions. A member walked in with 250 000 that he wanted to deposit in a shared savings account a request the teller was delighted to accommodate. When i suggested that a Money Market account might be a better option the teller quickly interjected with a vehement nO much to my surprise. When i asked her why not she responded by telling me that i should talk to the member about opening a Money Market account. i gladly obliged and the member decided to open a Money Market account after just a few minutes of specific product discussion. Once the member left i asked the Teller why she didn t discuss opening a money market account with the member. she confided that she didn t know enough about the product to feel comfortable recommending it to the member and didn t want to appear incompetent which would make the credit union look bad. We spent the next half hour talking about Money Markets and Certificate of Deposits so she would feel empowered to discuss both in the future. To this he credit union movement prides itself on building lifetime relationships with members by offering them the best products and services in the financial industry. We often speak about wanting to be our members primary financial institution--although i would prefer only financial institution--but do we actually live up to that ideal Tracking Products per Household (PPH) is one of the best ways to measure whether or not we do. simply put PPH is defined as how many products our members use on average. That sounds simple right Most of us probably assume that we fall into the double-digit category but do we really know i thought it would be interesting to find out what the actual number is. Last year i surveyed a sample of Credit Unions across a wide range of asset categories and was surprised to find that the average PPH was just 2.5. That roughly breaks down to mean on average our members use our CUs for checking debit card and savings accounts. We can hardly call ourselves a member s only financial institution when we have barely scratched the surface of how members use our services. i Here is a list of the basic products and services that that all of our members should be utilizing Checking Debit card savings Credit Card Line of Credit Car Loan(s) Mortgage Home equity Christmas Club Money Market Certificate of Deposits smartphone app Online banking Bill Pay Direct Deposit Auto Pay Deposit Anywhere May 2014 credit Union BUSINESS 11 LENdING LINE day i admire her honesty but am chagrined when i think of all the lost business her lack of product knowledge represents to CUs everywhere. Management pay attention neither employees nor members know enough about your credit union s full range of available products and services. Do your members know about all of your products and services Do you know how to answer the question How can you expect employees to engage members and help raise your PPH if they have not been properly trained or empowered to engage members This brings me to point number five We don t ask for the business. We are very good at filling member orders and satisfying the immediate reasons they came to see us. But that s usually where we stop when it should be where we begin. i recently worked with a young member who came into the credit union to get a loan on a new pickup truck. After spending some time getting to know the member and educating him on why a credit union does things differently we determined that we would give him our credit card and do an 8 000 debt consolidation loan. The young man was so happy that he actually got up to leave when he realized he had never asked if he qualified for the pickup truck loan. We told him that yes he had indeed qualified for the pickup truck loan and that we wanted to help him get on the right financial road. This young man was already a member at the credit union and was one of those 2.5 PPH members. in less than an hour we determined that there were other products that would benefit the member and he now has doubled his PPH. We will soon be looking at a mortgage for him and are well on our way to making this particular credit union his only financial institution. The new member experience is so crucial to building lifetime relationships that it can act as a double-edged sword. When we do an outstanding job getting our products and services into a new member s hands--especially our electronic Neither employees nor members know enough about credit union s full range of available products and services. services--we have without meaning to essentially given that member no reason to come back and see us. On the other hand if all we try for is the normal 2.5 PPH we may never get another chance to introduce that new member to our other products and services. What is the answer to this dilemma We need to maximize the new member experience by educating new members on the products and services that we feel are in their best interest and set up a follow-up program to build upon the relationship. But in order to do that successfully we need to make sure that every employee has been educated on all of our products and services understands how credit works and knows how to read a credit report. Plus they need to be trained to ask for the business They must believe in and use the product themselves. Why are most employees hesitant about asking for additional business i think because they fear being rejected. As consumers we have been conditioned to say no almost automatically. imagine walking into a store and being approached by a salesperson that asks if they can help. How do most of us respond By answering no thanks i m just looking . That s the response our MsR s and loan officers often hear when they ask members if they would like to learn about other products or services. They learn to anticipate being told no and eventually stop asking. i once worked with a new employee teaching him about the features and benefits of a credit union s credit card program. He promised to try finding out how to tell members why the credit union s credit card was the only one they needed by the time i returned. Three months later the young man came up to me and confessed that he was disappointed with himself. He 12 credit Union BUSINESS May 2014 LENdING LINE told me that although he had handed out well over 100 credit card applications only a few had resulted in new credit card accounts. He thought he had failed. i told him that he hadn t failed and had actually exceeded expectations He was 100 percent successful in educating members on one of the best products the credit union offered its members. He had planted credit card seeds in the minds of all 100 members to whom he d given applications and inevitably some of those would take root. if he had decided to stop after the first couple of turndowns fewer members would know about the credit card and fewer still would ultimately enroll. Training doesn t stop with one or two sessions. As income continues to remain difficult to earn it is important that we ask ourselves if we are doing everything we can. Are we doing our best to train and empower our employees Do they have enough confidence in their knowledge to engage members in discussion about using more of our products and services We must make this a high priority if we wish to increase our PPH. How much more income will we earn if we raise the average PPH from 2.5 to 10 15 or even 20 Remember PPH strongly influences loan and other income that drives your bottom-line. Make sure your employees are aware of the need to raise PPH all-day everyday and that you ve given them all of the tools and training they need to help elevate your CU s PPH Jack Kelly Jr. is Vice President for Lending Solutions Consulting Inc. (LSCI) May 2014 credit Union BUSINESS 13 cFO cUrrENcy Prepayment models P By Emily Hollis CFA Partner repayment modeling is a crucial component of analyzing mortgage loans and mortgage-backed securities (MBs) for purposes of investment or ALM analytics. Prepayments by individual mortgage holders affect both the amount and timing of cash flows. A prepayment model is a stochastic process used to estimate the level of prepayments on a loan portfolio that will occur in a set period of time given possible changes in interest rates. sophisticated prepayment models are typically based on mathematical equations derived from the empirical data analysis of historical prepayment trends from large prepayment databases such as FnMA. As interest rates rise prepayment models factor in fewer prepayments. if interest rates fall the opposite effect is accounted for as more people will refinance their loans. The most simplistic model uses a single prepayment speed for each loan type. As an example the model will average rates of 30-year 4.00 percent fixed-rate mortgages and use a single prepayment speed. This can produce vastly erroneous results as the propensity of an individual loan to prepay is a function of its specific characteristics. Other less effective prepayment models aggregate mortgages within ranges of coupons or age that are too wide and then use the relevant prepayment speeds for the average of the band to represent the entire group. For example 4.00 percent 30-year-mortgage securities should not have the same prepayment speeds as a portfolio of 3.00 percent and 5.00 percent MBs equally weighted. But before diving deeper into prepayment models let s discuss the definition of prepayment speeds. Constant prepayment (CPr) and Public securities Association (PsA) Prepayment speeds CPR is a loan prepayment rate that is equal to the proportion of the principal of a pool of loans that is assumed to be paid off prematurely in each period. Prepayment models are almost entirely driven by full loan refinancing not curtailments. For example a pool of mortgages with a CPR rate of 6 percent would indicate that for each period 6 percent of the pool s remaining principal outstanding will be paid off in a year s time. One of the most notable prepayment models is the PsA Prepayment Model created by the securities industry and Financial Markets Association. The PsA model assumes increasing prepayment rates for the first 30 months and then constant prepayment rates thereafter. The standard model referred to as 100 percent PsA or 100 PsA assumes that prepayment rates will increase by 0.2 percent for the first 30 months until they peak at 6 percent in month 30. 150 percent PsA would assume 0.3 percent (1.5 x 0.2%) increases to a peak of 9 percent and 200 percent PsA would assume 0.4 percent (2 x 0.2%) increases to a peak of a 12% prepayment rate. Given how easy it is to refinance in today s world PsA speeds are not commonly used in sophisticated prepayment models. Vectored Prepayment speeds ALM First utilizes sophisticated mortgage prepayment models that return a vector of monthly prepayment speeds that are specific to the attributes of each loan. The model accounts for refinance incentive burnout seasoning and seasonality and it incorporates other factors such as spread at time of origination and the home price index. The model is dynamic such that it is designed to return accurate projections in a variety of marketrate scenarios and for a variety of loan attributes. Prepayment speeds are said to be vectored when prepayment estimates are not held constant throughout the life of the security. To increase understanding let s analyze May 2014 14 credit Union BUSINESS cFO cUrrENcy the movement of mortgage rates after a fall in interest rates. Assume that rates in the 5-to-10 year range have fallen by 100 basis points. Mortgage holders now have an incentive to refinance if their coupons are higher than market but it may take a few months to do so. Prepayment speeds would increase over a period of months spiking to high levels and then they would experience a burnout effect as other mortgage holders don t have the capabilities or the know-how to refinance. The prepayment model might show CPR speeds similar to the following graph (exhibit 1) for only one single mortgage type e.g. a 4.00 percent 30-year mortgage. refinancing incentive seasoning burnout and seasonality. The ALM First model uses more than 40 parameters to describe the major factors as well as several secondary factors. Generally the first step in determining prepayments is assessing loan type i.e. whether it is a fixed-rate adjustable rate hybrid etc. The second step is accounting for loan type variation which will affect prepayments from a credit perspective jumbo conforming Alternative A (Alt-A) sub-prime high LTV etc. Other features would include loan size geographical location prepayment penalties amortization schedules etc. Mortgages will prepay based on situations such as housing turnover refinancing defaults curtailments and full payoffs. Trigger events for these prepayments are numerous but include unemployment employment transfers or promotions moving death marital difficulties business failures or any extreme hardship. But even after all of these variables prepayment models are primarily driven by refinancing incentives. How Often should You Update Your Prepayment Model There is no doubt that vectored prepayment speeds produce more reliable yields especially given a volatile interest rate environment and seasonal refinancing activity. The level and timing of expected prepayments are important inputs to both loan pricing and MBs investing. in the CMO space small changes in prepayment expectations can have a large impact on WAL and expected return depending on the CMO s structure. Prepayment speeds should be updated every time an analysis is performed. Mortgage rates can be quite volatile and even a 25 basis point movement can alter cuspy (commonly used system program) coupons. As an example in January of 2013 4.00 percent 15-year mortgages were prepaying at about 40 percent CPR. in June we saw mortgage market rates increase by approximately 100 basis points. By september 2013 CPR speeds decreased to 18 percent. if you were running your neV reports for June 2013 using 40 percent CPR speeds those 15-year mortgages would have weighted-average lives of less than two years which would grossly underestimate your interest rate risk. in addition to updating prepayment speeds models should be tuned and or refit typically on an annual basis. Factors That Affect Prepayments Most sophisticated models take forward interest rates into account. if the yield curve is upward sloping prepayment speeds will slow over time as projected rates increase. sophisticated repayment models are usually numerical models based on four major factors that affect prepayments May 2014 credit Union BUSINESS 15 cFO cUrrENcy are calculated figures not assumptions. The inputs allow the user to model cash flows with an end maturity and decay rates that are similar to amortizations. Dividend and discount rates allow for the present value calculations (premiums) in each modeled interest rate scenario. effective duration calculations can then mathematically be compared to that of the institution s assets. in this case effective duration is calculated by merely backing into the price change formula. For example if the liability present value is 100 in the base 101 in the up 100 basis point scenario and 99 in the down 100 basis point scenario the effective duration is one percent (i.e. (101-99) 200). competencies to meet the final requirements. The second sensitivity Analysis submitted when all requirements part and final application is are Exhibit 4 The outputs CFO CUrrENCy CUrrENCy CFO have significant implication on the ALM conclusion. The of time. Credit will need to be assumptions used should be changed in progressive intervals reviewed and authorized so How sophisticated is and and the output should be recalculated to determine the impact this can take weeks. of a different assumption. Your Model are uncertain as to if you To gauge how sophisticated your model the many requirements of Conclusion is consider the following questionnaire applying and using derivatives non-maturing deposits(exhibit viewed as a franchise value can be 2). if you answer no to consider engaging an external or benefits generated most of theseofquestions and you when from loyalty the membership have service provider to help you deposits are retained when dividend rates arealow in a higher a balancethrough withsteps. amount sheet the high market environment. of mortgages you used derivatives And vice versa A financial institution Properly might want to that offers a non-maturity dividend rate higher than market reconsider your prepayment analytics. can offset interest rate risk to attract hot money will decrease the economic withinofthe that is inherent value its liabilities. it is imperative This is vital because as competition Emily Hollis CFA is a partner with credit union industry model these accounts for a more ALM rate unions accurate depiction of allowFirst Financial to compete more grows derivatives can interestcreditrisk. Advisors LLC. The regulator strongly suggests sensitivity analyses as a means effectively. completed including dealer contracts. to quantify the effects of changing assumptions. sensitivity Emily Mor Hollis CFA is a partner with ALM First Financial setting up a line at a dealer is similar to becoming a Advisors LLC. analyses are essential because the core share evaluation may Emily Hollis CFA is a partner with ALM First Financial member of the FHLB--it can be laborious and takes a good deal Advisors LLC. 16 credit Union BUSINESS March 2014 2014 May January 2014 17 Credit Union BUSINESS 13 Credit Union BUSINESS cU mOrTGaGE LENdING Lending Tools for a New Generation of homeowner eMortgages s a product of the 80 s I have seen many trends come and go but one that appears to have survived is the belief that the next generation can solve today s seemingly intractable problems usually by learning from past mistakes. When I refer to the next generation in this context I m including both people and technology. i can remember talking about eMortgages back when first i entered the mortgage business twenty-eight years ago. We were still using carbon paper disclosures and had just begun allowing fax documentation. My children belong to the app generation and want to click for instant results without paper entanglements. Today paperless electronic mortgages are a reality. And knowing how to use them can be especially advantageous for credit unions which are typically more nimble and embrace change more easily than the big box lenders that are often their primary competition in local operating markets. The term eMortgage has many definitions and the e tag is thrown around far too easily and often. The mortgage industry s data standards group MisMO (Mortgage industry standards Maintenance Organization) defines eMortgage as a mortgage where the critical documentation at a minimum the promissory note is created executed transferred and ultimately stored electronically. To be clear we are not talking about scanning which is paramount to taking a Polaroid snapshot of a document and just as useless. With an eMortgage A By Keith Kelly and especially an enote a document appears on a computer screen that looks exactly like the normal paper note commonly used today but behind that screen image is something called a sMART (securable Manageable Archivable Retrievable and Transferable) document. There are many nationwide vendors that have sMART documents available for you to use. But wait a minute...can these mortgages really be executed and bought by investors Absolutely The legal foundation for these loans has been in place for some time. esiGn (electronic signatures in Global and national Commerce Act) was signed into law in 2000 along with a state legal template known as UeTA (Uniform electronic Transactions Act). essentially both laws say that the decision to receive and or sign documents electronically is an opt-in decision meaning that all parties must agree to use an electronic process which means a disclosure notice is sent to the member who must respond via electronic record or May 2014 credit Union BUSINESS 17 cU mOrTGaGE LENdING using a signature that can be in electronic form. it is important to note in that an electronic signature has the same standing in a court of law as a wet ink signature. neither law addresses the format of the electronic record or signature meaning they do not dictate the standard. For example both electronic signing pad pens and allowing members to click their acceptance (just like buying an item online) are acceptable. Other options are available as well depending on your organization s security level. i have seen a large mid-west bank close loans using enotes that are esigned via the click method. There is a great deal of available information about esiGn and UeTA in the marketplace. i have found that the MBA (Mortgage Bankers Association www. has great general resources as it relates to mortgages specifically in their eMortgage Resource Center. The eMortgage by definition is primarily focused on the promissory note which is logical because the eMortgage concept hinges on being able to create and move the note electronically while maintaining its enforceability. Here are a few new technology terms you should know PAPER WORLd negotiable instrument Original note Possession investor Holder Custodian endorsement & Delivery Chain of endorsements Wet signature ELECTRONIC WORLd Transferable Record Authoritative Copy of enote Control Controller Location (eVault) Transfer of Control Transferable Record Audit Trail electronic signature The emortgage by definition is primarily focused on the promissory note which is logical because the emortgage concept hinges on being able to create and move the note electronically while maintaining its enforceability. and Freddie Mac require using the MeRs eRegistry system. The eRegistry is the industry s response to eDocument and tracking requirements imposed by esiGn and UeTA. At a high level this central database identifies the current controller (holder) and location (custodian) of the Authoritative Copy of the enote. MeRs tracks two other very important items the Min (Mortgage identification number) and the hash value (a tamperevident seal) of the enote. every loan on the MeRs eRegistry has a unique Min (think of it like the Vin on your car no two are the same). The Min is typically generated out of either your loan origination or closing system and the hash value is created once the member witnessed by a notary signs the enote electronically. every electronic document has a numeric value the hash value is calculated around the enote by your system of choice for the eMortgage process. This very complicated number is your guard against document tampering. every time the enote has a transfer of control this number is recalculated against the original value presented to the eRegistry at the time of closing. if they match the transfer goes through. if they don t something on the enote has changed and you need to investigate. All of these terms come together in the MeRs (Mortgage electronic Registry system) eRegistry. The MeRs eRegistry is a central system of record for enotes and offers the basic legal infrastructure for the transfer of loans by providing a safe harbor as required under UeTA. it is important to note that neither law requires a specific solution rather that any solution that achieves the safe harbor is acceptable and to date the MeRs eRegistry is the mortgage industry s solution meaning in the future there could be others. However without the MeRs eRegistry each investor would be required to operate its own propriety registry and the uniform Fannie Freddie note would no longer be uniform. For this reason loans sold to Fannie Mae 18 credit Union BUSINESS How To Go About starting The Process As with every major project in any organization strong support from an executive sponsor is important. While this project will mainly affect the closing delivery secondary and servicing departments it s important to remember that it will crossover May 2014 cU mOrTGaGE LENdING several groups and multiple systems within your organization and that you will need to be connected to the MeRs eRegistry. As i mentioned earlier there are many vendors who have compliant sMART documents but the MeRs eRegistry is the primary method of secondary loan execution. MeRs has very high vendor standards in this market that must go through rigorous testing before they are permitted to go live. Any MeRs approved vendor can perform nearly all of the transactions needed throughout the life of an enote whether or not you need all of that functionality. some of the vendors include WAVe esign systems Fiserv signiaDocs encomia Digital Docs stewart Mortgage services and Xerox. their eMortgage website as does MisMO . What Are The Benefits Of implementing emortgage Capabilities enote creates shorter delivery times which provides greater use of capital eliminates courier overnight costs thereby reducing expenses enhances the timeliness and accuracy of data eliminates the risk of lost documents improves human capital enhances member borrower satisfaction it s a green solution Today s technology offers members the ability to do almost anything anywhere using their mobile devices so why not make the mortgage settlement process just as convenient and enjoyable That s what the e is all about...making it easy Major Milestones To Look For Once You ve selected A Vendor The vendor you select will handle many of these milestones and will be very helpful in assisting you with project management. However here are some critical path items you should be aware of Kick-off meeting Discuss your intention to change how you conduct this part of your business within your organization and with appropriate external partners Business education Review the various requirements that each part of your organization may have as it relates to loan origination closing and servicing implementation review process flow Go back to each affected area of your CU and present the proposed timeline and processes. Communication Present technological overview new procedures and benefits to CU staff Testing Form a select committee to test system and procedure implementation Production Work with marketing to go live needless to say your actual project plan will be much more complex and involve more details than those i ve mentioned in my outline. Use your outside vendors to help develop your implementation plan as well as create the actual procedures and technology. One of those resources might be MeRs given the knowledge they ve gained over the years. Fannie Mae and Freddie Mac also have a tremendous amount of information on Trivia in 2010 both houses of Congress passed a resolution recognizing June 30th as national esiGn Day. so don t forget to send me a card... electronically Keith Kelly is the Founder & CEO of Mortgage Harmony. Mr. Kelly is an entrepreneur who created and patented the Mortgage Annuity Revenue Stream (U.S. Patent 7292995) and has been in retail mortgage banking for more than 23 years. For the last 19 years he has advocated homeowner education by focusing on strategies that help homeowners avoid paying closing costs. His closing cost savings platform has been featured on CNBC in Money Magazine The New York Times Time Magazine The Washington Post Woman s World and through a host of other national media. His research and development suggests that a modifiable mortgage combined with MARS (annuity patent 7292995) solves some of the problems facing the mortgage industry today. He can be reached at kkelly May 2014 credit Union BUSINESS 19 cU TraINING Ladies and Gentlemen You are now Presenting By Paul Nunn llow me to set the stage One Monday morning senior management asks you to train the staff on a new procedure. Telling management that you don t feel comfortable doing so might become a career-limiting move so you agree and spend the next few days anxiously putting together a PowerPoint slide deck presentation on procedures that includes all of the correct information. The one-hour training session has been scheduled for 2 00 pm on Friday. The day arrives and although you re confident that you re as prepared as you can be you feel increasingly anxious as you wait for all of the trainees to show up. everyone arrives on time. The lights go down and you begin. The first fifteen minutes pass quickly and suddenly you re startled by a noise emanating from somewhere in the room. To your horror you recognize the sound it is snoring not crickets. A 20 if you found yourself developing a sympathetic cold sweat while reading that paragraph you re in good company. Most people find presenting in front of a group of people very stressful. Here are some great tips that i ve learned over the years that can help you overcome presentation anxiety. Be Prepared. The best presenters are the most prepared. i have presented certain topics hundreds of times. it doesn t matter. i still review. i still practice. Meet your audience. if you are not familiar with the participants greet them as they walk in and try getting to know a little about them. Pay particular attention to anything you might have in common with your audience. credit Union BUSINESS May 2014 cU TraINING Know your audience. Are you presenting to frontline staff or senior commercial lenders How much does your audience already know about the subject Do you anticipate any problems i once travelled all over the U.s. training credit union staff on overdraft services. One of the first questions i would ask the client contact person was how their staff treats members who overdraw their account. Most CUs i ve worked with feel that bad things can happen to good people and the credit union should support its members by continuing to provide service. A few credit unions believe that members who overdraw their accounts should not be allowed to keep their memberships. This was valuable information to have before preparing my presentation. Find out as much as you can about your audience and their comfort level with the material. if you are introducing new procedures you may want to ask your audience what they know about current procedures then build on that information. Pictures are worth a thousand words. showing slide after slide with 18 bullet points and 200 words is borderline abusive. The audience wants to hear what you have to say. Design your slide presentation to illustrate your words whenever possible. i try using as few words as i am able with the largest possible graphic. Below is an example of the kind of slide i typically use. i use this slide in a Difficult Behaviors in the Workplace course that i regularly teach Pictures are worth a thousand words. Showing slide after slide with 18 bullet points and 200 words is borderline abusive. The audience wants to hear what you have to say. Don t read to your audience. i m always amazed when i see seasoned training professionals turn away from their audience and read from their slides. never forget that your audience can read much faster than you can speak. i would ask someone in the group to read if i need something read from a slide. This helps keep them awake and engaged. Go to the parking lot. i always have a flip chart labeled Parking Lot in the front of the room. i use it as a safety net whenever i don t know the answer to a question. i ll say That s a great question. Let s write it on the parking lot and i ll get you the answer during break. This allows me to honor participant feedback and continue my presentation without slowing down. Bring an expert. it s always a good idea to bring in a subject matter expert (sMe) to help answer specific questions whenever you re presenting difficult and unfamiliar material. Be yourself. When you don t know an answer say so. if you are nervous be nervous. Your audience will appreciate your honesty. And trust me you don t need to tell your audience that you are really nervous. They already know. Use appropriate humor. i think my epitaph will read it Use handouts for the details. Provide participants was only a joke. Appropriate humor is a great icebreaker and with handouts when you need to present detailed specific can quickly diffuse a tense situation. However the joke must be information and use slides to display an overview. appropriate if it is to work. never make a participant the butt of a joke always make sure the joke is about you. May 2014 credit Union BUSINESS 21 cU TraINING Always remember the audience wants you to succeed. Yes that s right the audience wants you to be successful. Very few participants come to a presentation hoping the presenter will fail miserably. Think about this. How often have you attended a presentation hoping it would go badly for the presenters i doubt very often if ever. so remember The audience is on your side. i hope these tips will help you the next time you need to make a presentation. And don t forget to remind yourself why you re in front of the audience You are there to help. You want the group to get better at something because of what you re saying and you ll do whatever it takes to make sure their time is well spent. now i ve got to step out and go to a meeting. Keep learning Paul is an award-winning trainer from Houston Texas. Since 1992 Paul has worn many hats teller trainer instructional designer and training manager. In 2005 he was the recipient of the Training Professional of the Year award by CUNA and Affiliates. Currently Paul and his wife Iris help train organizations with their company Nunn Training and Development ( Paul lives in Spring Texas with his beautiful wife and their two children Emily and PJ and can be reached at info 22 credit Union BUSINESS May 2014 800.268.1884 TEchNIcaLLy SPEaKING Credit Unions Keeping Up With Banks for Mobile Banking Services T By Roy W. Urrico he statistics projections and surveys are in. supplying mobile banking to accountholders is no longer an option for credit unions. it is a must offer channel from a member-service standpoint and it looks like it is a bonus from a ROi perspective as well. The good news is that just as consumers now consider mobile banking a must credit unions appear to be well positioned to capitalize on the growing number of accountholders using m-banking services and are more than holding their own against bank competitors. Mobile banking refers to systems that allow members to perform transactions through mobile devices such as a smartphones and tablets. Last year 74 000 consumers began using mobile banking services such as bill payment balance inquiries and transfers every day according to Javelin strategy & Research. The adoption of mobile banking is occurring at a breakneck pace Javelin holds with 4 in 10 mobile bankers having used the service for the first time in the past year. By 2018 more than 6 in 10 mobile consumers or 63 percent could be using mobile banking. Over the next five years Javelin said the stream of customers switching to financial institutions with superior mobile services will soon become a river. Mobile Banking is a Deal Breaker for some Mobile is now mainstream it is table stakes for being relevant to consumers said Teresa epperson managing director in the Financial services Practice at AlixPartners in a press release accompanying the tracking study. some recent survey results demonstrate that accountholders want the mobile option. About 60 percent of smartphone users would consider leaving if their financial institution did not have 24 credit Union BUSINESS a mobile channel revealed a recently released AlixPartners Mobile Financial services Tracking study. This figure is up from seven percent since 2010 clearly demonstrating that mobile is in high demand. sixty percent of smartphone or tablet owners who switched primary financial institutions reported mobile banking capabilities as important or extremely important in their choice to change according to a February 2014 GOBankingRates study. The report found that 17 percent of people say mobile banking has a big influence on which financial institution they choose. Online banking which includes both internet and mobile banking is the second most important banking facet (after fees) among consumers looking for a new financial institution. May 2014 TEchNIcaLLy SPEaKING The availability of mobile banking features plays an increasingly critical role in the consumer s decision to switch primary banks according to Bob Hedges managing director in AlixPartners Financial services practice in a press release. Consumers are demanding expecting and shopping for mobile capabilities. Banks who fail to innovate run the risk of losing customers and face real challenges in attracting new customers. The mobile channel sees more regular use as well. The AlixPartners Tracking study indicates that 48 percent of mobile consumers will conduct mobile banking this year up from 43 percent in 2013. The study also shows strong growth in the adoption of mobile banking services overall with mobile banking now being used by 28 percent of the U.s. banking consumers up four percentage points from the survey in the first half of 2013 and up nine percentage points from AlixPartners 4Q2012 survey. The AlixPartners research also suggests that this trend will likely continue as smartphone tablet and other digital device sales increase and as U.s. consumers spend more time using mobile devices for banking transactions including checking bank balances looking at monthly statements making account transfers and paying bills. While more adoption is occurring the service continues to have its doubters. Javelin found that 41 percent of survey participants were still apprehensive of using the technology mostly because of security concerns. However a report by the Federal Reserve found that 56 percent of the mobile banking users found mobile banking comparatively secure and roughly 97 percent say they use mobile banking at least to check account balances. in 2011 and another 36 percent launched mobile banking in 2012. Credit unions stack up just as well when it comes to specific features as well. A new GOBankingRates survey asked 1 500 respondents which mobile banking element they use most often to determine which services Americans could likely not do without for their everyday mobile banking use. Responses were as follows Balance inquiries 36 percent ATM branch locator 19 percent Money transfers 14 percent Account activity alerts 10 percent Remote check deposit 10 percent I don t use mobile banking 10 percent GoBankingRates investigated the top 50 credit unions in the nation by asset size to determine how credit unions mobile banking services stack up when it comes to those popular mobile banking features. According to its findings the largest U.s. credit unions extend the same mobile features as their banking counterparts. The side-by-side comparison revealed that 42 of the top 50 credit unions provide all five of the top mobile banking features. Additionally 49 of 50 institutions offer at least the top three most-used mobile services. Looking at it another way 84 percent of the credit unions sampled offered solutions for all of the popular services. And 98 percent of the credit unions offer at least the top three mostused mobile services. Big banks need to watch out said Jennifer Calonia senior editor of GOBankingRates in a press release adding Customers who were once hesitant about credit unions are now realizing the technological advances these institutions provide at a huge value. it s the personalized service experience that longtime members expect from credit unions combined with the cutting edge technology younger generations desire. Credit Unions Up to speed When it comes to online and mobile services the public has an incomplete understanding of credit union offerings holding onto the erroneous conviction that they are too far behind the times with cutting-edge technology when in fact the opposite is correct. A Callahan & Associates 2013 Technology Priorities survey shows that credit unions have in fact been ahead of the curve. For credit union respondents who offer mobile banking 29 percent launched the service in 2010 or earlier. Thirty-five percent of respondents who offer mobile banking launched their initiative Obtaining Members Through Mobile spotlighting the importance of innovation mobile remote deposit capture (RDC) adoption is growing steadily among the banked population as more financial institutions roll out mobile deposit-taking capabilities. Across smartphone or tablet owners of all ages according to the AlixPartners s study remote deposit capture (RDC) adoption is growing fast now up to 22 percent from 18 percent in early 2013. May 2014 credit Union BUSINESS 25 TEchNIcaLLy SPEaKING Cost shifting as Well The behavior and decision making of consumers who have adopted mobile is making the business case for mobile innovation and promotion by financial-services institutions easier. AlixPartners tracking study for example reveals as consumer adoption of mobile banking grows account holders use of higher-cost banking channels such as traditional branch service and live customer-service call centers appears to be declining. According to the study mobile-banking users reported visited a branch 39 percent fewer times per month after adopting mobile banking services. This is good news. The Javelin strategy & Research survey finds mobile banking more cost effective with the average cost per transaction being only ten cents versus 1.25 per ATM transaction and 4.25 for an in-branch transaction. Members expect to connect with their financial institution anytime and anywhere. They want to be able to access their money when it s convenient to them and through the channels that are most convenient to them. Credit union mobile banking is just one facet of a greater digital strategy that credit unions must focus on if they hope to achieve sustainable growth. Roy Urrico is a freelance ghostwriter and byline writer of books articles newsletters guides case studies and white papers about financial institutions financial technology compliance information security credit and collections foreign exchange and many other financial topics. To find out more about how Roy can help your organization check out Roy s profile on LinkedIn visit his Web site at or email him at roy customers who were once hesitant about credit unions are now realizing the technological advances these institutions provide at a huge value. The largest group of RDC adopters tend to be younger and wealthier and to use more of the products available at their primary financial institution than non-adopters. We will increasingly see banks developing and rolling out capabilities aimed at addressing specific consumer pain points and opportunities to add value. if mobile RDC is viewed as the current big attraction in the ongoing wave of industry innovations on behalf of consumers mobile photo bill pay could be the next big thing added epperson. in the fourth quarter of 2013 28 percent of consumers in our survey between the ages of 26 and 34 reported themselves to be likely to change banks to gain access to mobile photo bill pay. Then there is the X-factor. Much effort steers mobile toward the Millennials (or Generation Y). However a recent survey on FindABetterBank Gen-X consumers desire mobile banking features more than Gen-Y. Gen-X consumers use their smartphone for payments more than Gen-Y. Young Gen-X consumers are more likely than Gen-Y consumers to use their mobile devices to pay bills make retail POs payments or send money to friends or family members. Young Gen-X consumers are 15 percent more likely than Gen-Y consumers to indicate they must have mobile check deposit with their new checking account and they re slightly more likely to say they must have a mobile banking app. These conclusions don t propose that it s less essential to attain Gen-Y members. nevertheless it does point out that those most likely to want mobile banking services nowadays are people who are a slightly older and with less time on their hands than Gen-Y. CEO SUBSCRIPTION WiTh BeneFiTs Benefit your CFO COO CMO CCO CLO CIO HRD With Free Monthly E-Newsletters Subscribe NOW register 26 credit Union BUSINESS May 2014 cOmPLIaNcE UPdaTE What flood insurance reform Means for Credit Unions and Members F By Michael R. Christians ollowing the onslaught of activity generated by the Consumer Financial Protection Bureau s (CFPB) new mortgage rules which took effect this past January many credit unions-- after taking all of 12 seconds to sit back and relax--find themselves wondering what the next big thing is in the area of mortgage lending compliance. Those of you who were anxious to establish mandatory escrow accounts for flood insurance in all of your newfound free time might want to stop reading now. in July 2012 Congress passed the BiggertWaters Flood insurance Reform Act. This legislation was designed to overhaul the Flood Disaster Protection Act of 1973 and place the national Flood insurance Program (nFiP) on firmer footing. some provisions of Biggert-Waters were effective upon enactment while others are awaiting the publication of final implementing regulations. On October 30 2013 the national Credit Union Administration (nCUA) alongside other federal regulators published their joint proposed rule to implement the Act however as of publication no final rule has yet been announced. As is the norm in regulatory compliance matters have become even further complicated. in January the United states senate passed the Homeowner Flood insurance Affordability Act in response to numerous reports of complications surrounding the implementation of Biggert-Waters. The House of Representatives followed suit in March. The final rendition of the Act which essentially mirrors the House bill made its way to the White House and was signed into law by President Obama on March 21. so if you are mildly confused as to the state of the law as it exists today you are likely not alone. Let s take this opportunity to review what provisions of Biggert-Waters are already in effect those yet to come and how the Homeowner Flood insurance Affordability Act has changed the turbulent waters of regulation even further. What should i Be Doing now Force Placement of Flood insurance This provision of Biggert-Waters took effect on July 6 2012. As May 2014 credit Union BUSINESS 27 cOmPLIaNcE UPdaTE Biggert-Waters imposes new disclosure requirements on your institution. These new requirements will be implemented by regulation. insurance Affordability Act. However nothing in the new law eliminates or delays the new disclosure requirements. As a result your credit union should be prepared to comply with the following new disclosure requirements upon the effective date of the revised final rule. First you must disclose to the member that flood insurance is available from either private insurance companies that issue standard flood insurance policies on behalf of the nFiP or directly from the nFiP itself. second you must disclose to the member that the same level of coverage available under a standard flood insurance policy from the nFiP may also be available from a private insurance company. And finally you must encourage the member to compare flood insurance coverage deductibles exclusions conditions and premiums associated with policies issued under the nFiP with those policies issued by private insurance companies. a result your institution is probably already in compliance--or should be. Under this section if your credit union determines that a member s flood insurance policy has expired or no longer offers adequate coverage you must notify the member of the problem. if the member has failed to purchase flood insurance or provide adequate coverage within 45 days of such notice you may force place flood insurance on the property. The premiums and fees associated with this force placed policy may be passed on to the member. Your credit union is permitted to backdate the effective date of the force placed policy to the date upon which the member s original policy lapsed or became inadequate. if after having force placed insurance you receive confirmation that the member has purchased their own policy you must terminate the force placed policy. This must be done within 30 days of receiving confirmation of the member s policy. in addition if there is any period of overlap between the member s policy and the policy force placed by your credit union you are required to refund any premiums or fees paid by the member on the force placed policy. escrow of Flood insurance Premiums Biggert-Waters requires that flood insurance premiums and fees be escrowed on all loans closed on or after July 6 2014 as well as any loan outstanding as of that date. The Homeowner Flood insurance Affordability Act has delayed implementation of this mandatory escrow requirement until January 1 2016. Furthermore the Act provides a host of exceptions. First certain What should Be On My To-Do List categories of loans are now excluded from the mandatory escrow provision. These include new Disclosure requirements Home equity lines of credit Biggert-Waters imposes new disclosure requirements on your Loans secured by real estate or a mobile home that is used institution. These new requirements will be implemented by for a business purpose regulation. The proposed rule published in October 2013 will need to be revised due to the passage of the Homeowner Flood 28 credit Union BUSINESS May 2014 Ready for more value from your ATM provider Open your doors to a new ATM provider For decades Cummins Allison has helped you make the most of your branch resources. Now we re excited to offer a complete line of highly reliable secure full-function ATMs to fit any branch configuration from drive-up to walk-up. And best of all our ATMs are backed by the responsive dependable local service you need and have come to expect. So open your doors and give us a try. When you re ready to replace add to or expand your ATM network let s talk. Visit letstalk 2014 Cummins Allison Inc. All rights reserved. cOmPLIaNcE UPdaTE Loans secured by a condominium or similar property where the association provides flood insurance as part of common expenses Junior or subordinate loans where flood insurance is already provided under the superior loan non-performing loans and Loans with a term of 12 months or less. in addition the mandatory escrow requirement will only apply to loans originated on or after January 1 2016. escrow for flood insurance premiums on loans outstanding as of that date is optional. instead your credit union need only provide those members with the option to escrow their flood insurance premiums. in summary while your institution has already dealt with applying some of the provisions of the Biggert-Waters Flood insurance Reform Act of 2012 the Homeowner Flood insurance Affordability Act gives you some much needed (and much deserved) breathing room in implementing others. More importantly the new law helps many homeowners avoid having to choose between finding a way to pay for drastically increased flood insurance premiums and keeping their home. Michael R. Christians provides PolicyWorks credit union clients with strategic advice in all areas of federal compliance. Working within the financial services industry for over 17 years Christians has experience in compliance as well as consumer and real estate lending. Most recently he received his law degree from Drake University Law School. As a national leader in credit union compliance solutions PolicyWorks is known for having the vision and expertise necessary to assist with the most challenging compliance issues. For more information visit The services provided by PolicyWorks should not be construed as legal services legal advice or in any way establishing an attorney-client relationship. COMPLIANCE IS OUR POLICY PolicyWorks is a national leader in credit union compliance solutions. Our team of experienced professionals offer a wide array of compliance services. We re your partner to make compliance easy. Visit us online to learn more 30 credit Union BUSINESS May 2014 viSit tHe MarKetPlaCe Page at WWW.CUBUSineSS.CoM MArKeTPLACe Card Processing Payment Solutions Currency Coin Handling What Does Automating Your Currency Handling Needs and Providing Self Service Coin Redemption do for Your Branch It Gives Your Tellers Tools for Success Increases Branch Teller Increases Cross Selling Efficiency Opportunities Helps to Meet Member Strengthens Member Expectations Retention Reduces Costs Adding to your Bottom Line What Does it Take to Learn a Little More Not a Lot... Just ask your Magner Representative Phone 800-243-2624 Email solutions Online Let s talk about doing things the right way... Self-Service Coin Centers Currency Dispensers Currency Recyclers Proven Performance and Quality cU TraINING The resilient credit Union By Ken Schroeder you ve appointed your Compliance Office to handle your business continuity plan. Great now move on to discussing where to locate the next branch after you review the presentations from the three vendors who are trying to sell you an app for mobile banking which you ll cover as soon as you review last quarter s financials and mandatory ratios. And you ll get to that once you iron out the details of the tent you re setting up at the fairgrounds car show. But your first priority is sitting down with the Compliance Office to come up with a game plan for making sure the credit union conforms to the new CFPB mortgage rules. When all of that s done you can get back to checking in on the continuity plan. Until something more important knocks it off your priority list again. sound familiar You shouldn t have to worry about your business continuity plan much less the planning process since you ve assigned it to someone who is detail oriented right Well the answer to that depends on what you expect the compliance person in charge of continuity to actually do. Do you want your business continuity plan to simply pass muster with the examiners or are you actually committed to creating a climate of resilience within your credit union for its members if your answer is Pass examiner Muster you can quit reading right now. You simply want to fill in all the squares and pretend OK everything s OK. nothing i can write will change your mind. Besides if you re lucky everything just might continue to run smoothly. Let s hope there won t be a disaster on your watch. Of course you re betting against the odds. in the business continuity world we believe that it isn t a matter of whether a disaster will occur it s simply a matter of when. You re betting with your credit union and your credit union s members money when you don t take the potential for disaster seriously. You re the CeO. You hold the keys to the kingdom. You have been given stewardship of your members the wealth. Keeping your doors open during or immediately following a crisis is your responsibility. Building a resilient organization should be your number one priority. Providing the cash your members will need in a crisis is up to you even when your network is down. Creating ways for your credit union to bounce back from any crisis demands your leadership. What Does A Resilient Credit Union Look Like One of the best ways to answer this question is to examine what it doesn t look like. During a crisis a resilient credit union doesn t Close its doors at the first sign of inconvenience blizzard tropical storm fire power outage or any type of physical plant breakdown. 32 credit Union BUSINESS May 2014 cU TraINING What should The CeO Do Your job is to implement what i call the Five i s Identify the risks affecting your business. What can stop your credit union from operating Oh sure everyone can name the obvious--robbery fire power outage pandemic blizzard hurricane tornado flood and infrastructure issues. Your job is to imagine everything else A vehicle crashing through your front door a riot making the streets around your building dangerous or inaccessible or a city sewer collapsing and impacting your building. Then decide what you can do to soften the impact or lessen the duration of any such crisis. You may find some surprisingly simple solutions that just might save the day. Initiate a prioritization strategy for your credit union. What branches do you close first What business departments can postpone their work to support more critical areas What departments are critical to keeping your doors open Think about the little old lady who takes a cab to her branch every month to deposit her social security check going on line is not always an option. How long can you keep your doors closed and still keep members loyal Instill a sense of resilience in every staff member from newest hire to most senior VP. Motivate them to want to keep the doors open and support every member during the difficult times. Demand that every department head and product line has the capacity to overcome a significant loss of people location and automated processes. You might actually find a few opportunities for process improvement when you go through this prioritization. Compel each department head to work with the compliance officer to document those backup plans. Insist that the plans are exercised. And by that i mean execute routine emergency preparedness drills during which Tellers must operate off-line the appropriate staff telephones any vendors they would contact in the event of an actual emergency various less critical departments shut down to assist colleagues in designated critical departments staff relocates to backup locations to work for a day etc. sitting management around a conference table discussing what they would do if this happened for real isn t exercising the plan. You might consider you re the cEO. you hold the keys to the kingdom. you have been given stewardship of your members the wealth. Tell members you ll get back to them later. Or worse tell them nothing. ignore both positive and negative social media comments from members and non-members. Back away from supporting community activities and events. Limit member access to cash when access to the core processor is down. A resilient credit union avoids these pitfalls by having a solid meaningful executable business continuity plan in place that is directed from the top down not blindly passed off to the compliance officer. A resilient credit union Has a contingency plan ready that will keep the doors open or at a minimum reopen them as quickly as possible in the event of an emergency. Keeps members informed of anything that might impair a member s ability to access their funds including reasonable expectations of how and when their funds will be available. Understands the importance of effectively managing social media during a crisis and using it to keep its members informed. is active in reaching out to the community even when the credit union and staff are coping with their own trauma. Has tellers who can operate off-line with only slight delays and at nearly full capability for an extended period of time. There are many other signs of resiliency but i ve focused on those that typically get dumped on the compliance officer s desk. Building these institutional capabilities does not belong to the compliance officer if you re the CeO they belong to you May 2014 credit Union BUSINESS 33 cU TraINING bringing in someone who can facilitate your exercise and give you an unbiased plan review. Invoke a programmatic follow-through from every exercise that includes detailed corrective actions addressing any issues that were uncovered. Assign a specific person to ensure these actions are completed. Document what was done to fix the issue. Document what changes they make to the plan. Document how training has changed. ensure that each issue the exercise uncovered becomes a focus on the next exercise. i ve focused on resilience from a business continuity perspective. But the ability to bounce back from adversity extends far beyond the business continuity world. it also applies to your risk management activities including investing interest rates credit economic outlook reputation vendor management and governance. Creating a more resilient organization benefits every aspect of your credit union. isn t that what you really want After all you owe it to your members Ken Schroeder is VP of Business Continuity for Corporate One Federal Credit Union. In addition to his duties there he provides consulting services to real-person credit unions. These services include plan reviews staff and board training exercise development and facilitation and complete program and plan development. He developed and teaches a one-day seminar course in Business Continuity Planning for Credit Unions and has spoken for CUNA and Disaster Recovery Journal confer3ences as well as numerous League and Chapter meetings. He can be reached at kschroeder so What Did You Really Do Once you examine all the steps i ve suggested you take to make your credit union more resilient you ll find that most of them encompass skills you should be exercising anyway leading mentoring training defining goals motivating nudging cajoling managing and providing insight. Yes that s right your normal CeO leadership duties. i ve simply asked you to focus your skills on ways you can make your organization more resilient. 34 credit Union BUSINESS May 2014 aT c LEVEL the Company Killers hen an ousted CEO is invited back to address the corporate decline since his departure he poses a straight-to-thepoint challenge to his attentive audience. Enjoining them to help him slay the company killers that have brought the company down he introduces a new way of thinking a promise of commitment and redefines the concept of teamwork in the process. Hector approached the podium with mixed emotions. He had made the trip many times before but that was four years ago--before he had retired from the top job in the same company he was about to address. As he drew near the platform he recalled past days when he had stood on the same stage and bragged about the company and its employees. They had enjoyed success for many years until a squabble with several new board members had resulted in Hector s ouster. Leaving the company hadn t bothered him all that much but watching the new board members form a coalition management team that made one mistake after another filled him with sorrow. saddest of all was one increasingly obvious fact The new team didn t seem to learn from its mistakes. The company s decline had become apparent two years after Hector s departure and by the end of year three the struggling company had begun implementing routine cost cutting and downsizing measures. By year four the newly transformed lean machine had proven itself to be a big loser. That s when the board panicked. The result The newly re-organized board had approached Hector to return for a short period to right the ship. Hector had agreed--not because he wanted to but because he simply could not stand the idea of his baby failing. He also didn t like the bad reputation that today s CeOs had earned in part but didn t deserve in general. The excited applause interrupted his thoughts and he looked out into the audience through his thin-rimmed glasses. nestled among many new faces several familiar mugs smiled W By Marc A. Bringman back at him. He returned the smiles and waved to the entire team. At the podium he stood silently and continued smiling at the assembled group. The applause quickly died down. And he began speaking. i suppose you re expecting a miracle aren t you Laughter ripped through the crowd. Well you re not going to get one from me. Know why he asked rhetorically. He paused for several seconds while staring at the group. His brown eyes turned black with anger. We ve lost our soul my friends. We ve abandoned what made us successful and have fallen prey to what i call company killers. Again he paused this time for effect. it was clear he had the group s attention. Hector wasn t sure why. Perhaps it was his delivery or perhaps simple desperation but whatever the case he liked the result. i ll tell you what i m going to do i m going to remove the company killers. A few people applauded most didn t understand the point. since i can t go it alone i invite you to join me in slaying these dragons. But to do that my friends you have to know what these things are. May 2014 credit Union BUSINESS 35 aT c LEVEL Again he paused. He removed his glasses. As if by force of habit he placed the top of the glasses temple into his mouth and unfocused his eyes. silence filled the room as he considered his words. Then he slowly withdrew his glasses from his lips and grabbed the podium with one hand while dangling the glasses over the front corner. He began again. Where is your team When i asked this question two days ago i was told that the company was a team. no such thing. i suggest we define that term before we try to create any more of them. We ll have to do this because we will have to be better than the sum of our parts. Hector glared at the group locking eyes one at a time with four different people. What kind of recognition programs do you have Are you recognizing accomplishment or are you rewarding the last person who did you a favor He paused and looked several audience members directly in the eyes before continuing From now on anytime you see these things immediately excise them from our company. That is our assignment your assignment and if you do this i promise you that we will be successful once again. Fail however Hector looked directly at several folks and nothing will dig us out of this hole nothing You see folks this is a self-inflicted wound and only the people in this room can heal it. Remember this Our products are sound our tactics are not. Communicate Hector didn t realize he was tapping emphasis with his index finger but when he stopped it served well to signal the next point. For a moment his face and voice softened. The process has already begun. i am communicating and we will communicate through this entire process and beyond. We must understand each other. Communication is the foundation of respect. i sense we are afraid to talk to smile to even look at each other. Therefore whatever respect we have is brittle. And nothing of substance can be built on a brittle foundation. so we will talk and we will understand. We will rebuild that foundation so we can return joy to the workplace and most importantly we will once again enjoy the benefits of common respect. Goals now let me ask you this Where are your goals Do you have a set of company goals How about personal goals if you don t have goals how on earth do you know where you re going How will you tell when you get there some team members giggled nervously. Hector met them with a stern look. The absence of goals will kill our company your team and yes you too. Always Fall Forward You will participate in this process. it will be a partnership. We will define our tasks assess the risk set our milestones and achieve our goals. if we blow it we ll find out why and fix it. When we fail by the four winds we will fall forward On our faces perhaps but forward. Hector dropped his glasses on the podium walked to the center of the stage and looked at the crowd. Always fall forward he whispered to a silent audience. Always move forward but not without direction and the support mechanisms in place. We will not force things from top down. instead we will visibly support our efforts practice what May 2014 Commitment To succeed my friends we--and yes that includes senior leadership--need commitment. All of us need to be involved and no one will escape the problem. Here Hector stopped looked at one of the top managers and asked Are you committed 36 credit Union BUSINESS aT c LEVEL There s an old story about a man watching three stone masons each one chipping on identical stones. each appeared to be in different stages of development but carving the exact same figure. He asked the first stonecutter What are you doing i m chipping a stone sir the mason replied. Then he turned to the second sculptor. And what are you doing my man i m sculpting a gargoyle the second stonecutter answered with a glib grin. Finally he turned and tapped the shoulder of the last man who was hard at work and hadn t noticed the conversations. Pray tell my friend what work are you doing The third mason stood up and pointed to his creation. i m building a cathedral. is it not beautiful he asked expecting the man to be able to see his small statue perched high atop one of the grand cathedral s spires. if we too can see the cathedral we can build a future. Hector remonstrated his audience. He moved the glasses to the other hand and placed them on the podium. He peered into the depth of the audience. You can do this. You can do this because i m telling you that you can. i ll bet until now you haven t been told you can do it. We have the ability the means and the time to do this. Believe me Hector didn t wait for an answer. Probably not we ve broken your trust. He paused. i will not entertain you by asking you to trust me but i will ask you to do one thing Watch and observe. Let the deeds win your trust. Then follow. Then lead. i ll see you Monday and we ll begin. At that he just walked away across the stage spinning his spectacles in his right hand. The applause started late but by the time he exited the auditorium the entire group was standing and screaming accolades. Hector was glad to hear the sounds of approval but he wondered if the applause was the determined noise of commitment or the desperate clap of hope. success he knew depended on the former. Marc A. Bringman was the editor of Credit Union BUSINESS and the author of Swapping Lies Deception in the Workplace. For a moment his face and voice softened. The process has already begun. I am communicating and we will communicate through this entire process and beyond. We must understand each other. communication is the foundation of respect. we preach design roles and set reasonable milestones being careful not to overwhelm the people doing the work. Dream Here s the catch my friends i m putting all of you in the boat with me and perhaps then you won t be poking any more holes in the bottom. Hector stopped looked at the black ceiling took a deep breath and then placed an unfocused gaze on the crowd. At that instant he seemed very sad. His face showed pain--as though he was recalling some painful experience from his past. He began again i look around and i see no dreams. Don t believe me Look around yourself. see any dreams i don t. in a company that dreams you see the evidence of those drams everywhere--small groups excitedly discussing new ideas problems and products. You see pride of ownership pride of workmanship and pride of association. Again he locked eyes with another audience member. You see he said now pointing a tan index finger to the side of his head. When you are aware in here you know where you are and what you are doing. imagine everyone in this company making the right decision at the right time. Well it s possible. Hector reached under the podium for a bottle of water. He cracked the top and swallowed twice. As he put the bottle back he continued. May 2014 credit Union BUSINESS 37 cU SPOTLITE BCU Narrows marketing for Wider Impact e By Sharon Sweda xciting things are happening at BCU the Vernon Hills illinois based credit union. Points of difference start with the non-profit status of BCU. initially organized as an employee credit union BCU has evolved over the past 30 years and currently serves select employee groups in the United states and Puerto Rico. The non-profit institution boasts over 1.7 Billion in assets but refuses to rest upon its laurels even as they serve their more than 150 000 member-owners. At the time our members used an average of 3.2 products each discloses Ryan szeliga BCU s Marketing Manager. While we weren t necessarily looking to add more employee groups we wanted to raise our per-product number closer to four. As with any intelligent goal-setting activity szeliga spearheaded a campaign designed to help them achieve that goal by launching a targeted marketing campaign using datadriven marketing. Unlike past batch and blast efforts we converted to a program that first isolates then groups like recipients. That way we could promote products directly to the very members who had already expressed some interest in the products we were promoting szeliga explained. A daunting task perhaps but by combining regional MLs services credit bureau lists and neolane--with whom BCU was allied--the task was not only achievable it was sustainable and better still measurable. neolane sorted through the list data to create various member groups then developed print and electronic marketing targeted to address specific member group needs. Whenever a member s home shows up on an MLs report list or a credit bureaus shows that they ve made a mortgage or auto loan inquiry we will target them to promote one of our mortgage or auto loan products. As a non-profit our objective is to provide low-cost financial products to our members and that means that our products are typically the most competitive szeliga added. BCU is a unique financial services provider and covers a broad spectrum of select employee groups that include CDW Boston scientific Cardinal Health Target and of course Baxter international (Baxter is the B in BCU). Their business model differs from those of traditional credit unions that serve local or surrounding geographical markets and BCU has two standalone branch offices and over 30 full-service facilities all housed within a select-employee group s facility. in addition to making good financial sense members enjoy convenient physical access and the latest on-line tools commensurate with what the largest banks offer including on-line and mobile device account access. BCU also offers free electronically scanned deposits. BCU offers all of the same services as banks just better and cheaper affirms the marketing manager. At the time the northern illinois credit union was eager to implement their new marketing program yet guarded about expectations. We realized that this form of marketing takes some time before it become effective. Folks who list a home for sale will generally not shop for a new mortgage until their current home is under contract and they have completed negotiations on a new home purchase reminds szeliga. Knowing that we will hit them with a targeted message within a day of listing their home is one of our biggest advantages. We also planned to create an in-bound process where we not only respond to member triggers on our website or within our branches but to include a teller prompt so that they offer the appropriate products to the members on the list. it stands to reason that as marketing becomes more and more client-specific the longer its shelf life. BCU has harnessed its energy and channeled their messaging. They ve enhanced 38 credit Union BUSINESS May 2014 cU SPOTLITE their service platform by targeting their efforts to those who are in the market. By doing so they ve eliminated redundancy and prevented unwelcome marketing from reaching disinterested parties. Sharon Sweda is a freelance writer who has worked in the real estate and finance industries for the past 28 years. Contact Sharon at sharonsweda to SpotLite your CU. BCU Milestones 1981 BCU is created and appoints first CeO Rex Johnson. Loans and direct deposit are introduced. 1985 VisA Credit Cards and Home equity Loans are made available 1987 BCU s first ATM is installed and BCU automated response teller (BART) is offered. 1991 BCU first starts issuing mortgages. 1994 Mike Valentine is named CeO goes online and 24 7 loan approvals begin. 1996 Members Financial services brokerage services is introduced and BCU begins offering the VisA Check Card. 1999 Online Banking is offered BCU reaches 500 Million in assets and moves to their second headquarters location in Vernon Hills iL. 2000 Credit card CURewards points introduced. 2006 BCU reaches 1 Billion in assets. 2007 BCU moves to their third headquarters in Vernon Hills. May 2014 credit Union BUSINESS 39 crOSSWOrd Qualify to win an iPad Mini on June 1st To qualify 1. 2. 3. 4. 40 credit Union BUSINESS Read Credit Union Business. Answer the questions. to enter register on Qualify to WiN an i-Pad Mini. May 2014 tmc 888.918.7357