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THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS THE BUSINESS ISSUE CEO VELOCITY Interviews with Top CEOs OCTOBER 2015 VOLUME 10 ISSUE 10 Amplify Credit Union s Paul Trylko CEO s Thoughtful Journey Impacts Many Lives SCOTT MCCLYMONDS MORTGAGE BUSINESS Credit Union Fair Lending Risk in Mortgage Lending DANIELLA CASSERES TEAM BUILDING Introducing the CUB Team Builder (on page 7) Their Loyalty. Your Revenue. INCREASE BOTH WITH SWBC At SWBC we know what s important to our credit union clients--serving their members and increasing fee income. Our comprehensive products and solutions can help you generate more revenue while increasing the loyalty and value of your borrower relationships. Give us a call at 866-316-1162 or visit to learn how we can develop an income generating program that is the right fit for your credit union. AUTOPILOT LENDING GAP WITH POWERBUYTM MMP PAYMENT PROTECTION PROGRAMS INSURANCE PARTNERS OUTSOURCED LENDING CARD SOLUTIONS 2015 SWBC. All rights reserved. 5540-1305 CUB 0215 TABLE OF CONTENTS VOLUME 10 ISSUE 10 Credit Union BUSINESS Their Loyalty. Your Revenue. THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS INCREASE BOTH WITH SWBC Visit or call 866.316.1162 to learn more. 2015 SWBC. All rights reserved. 4 6 P U B L IS H E R S POV The Team Builder Tim O Hara C E O V E L O CI TY 29 STR ATEG IC P LA NNING The 2016 Strategic Stink Bomb Repricing the Risks of Credit Union Deposit Insurance Marvin C. Umholtz Amplify Credit Union s Paul Trylko How a CEO s Thoughtful Journey Impacts Many Lives Scott McClymonds 33 36 40 43 46 TH E LAW The Supreme Court Talks About Stripping Brad R. Bergmooser TITLE INSU R A NCE 11 14 16 20 24 27 C FO C U R R ENC Y Role of an ALCO board member Emily Hollis T E C H N IC A LLY S PEAKI NG A Title Industry Framework Assists Credit Unions with Vendor Risk Management Pete Pearson and Matthew Rekers B R A NCH AU TO MATIO N EPL Goes Global Stays Personal Wayne Benson MO RT G AG E BUS I NES S Mobile Appointment Booking Solutions Make CUs More Efficient Tech Savvy Meredith Deen B R A NCH B U SINESS Credit Union Fair Lending Risk in Mortgage Lending Daniella Casseres CUSO Making the Case for Branch Transformation David Peterson MEMB ER EX P ER IENCE Why Focus on Why Larry Hayes L OYA LT Y What Is the Future for Credit Unions and Loyalty Bethan Cowper C Y B E R S PAC E An Effortless Member Experience is Critical in the Current Regulatory and Economic Environment Patricia Tripar CO MP LIA NCE U P DATE 49 52 O C T O B E R Four Questions Credit Union Employees Need to Ask to Combat Phishing Scams Tom Neclerio Compliance Officers Get Your Head in The Cloud Cindy Williams LEND ING SO LU TIO NS You Can Collect From a Turnip Karin Brown-Purtell CLE 1 2 0 1 5 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S ABOUT US THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS PUBLISHING TEAM Tim O Hara Editor & Publisher tim THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS Ashok Kumar Associate Publisher ashok Patti Manzone Designer PUBLISHER S POV THE BUSINESS ISSUE CEO VELOCITY Interviews with Top CEOs OCTOBER 2015 VOLUME 10 ISSUE 10 Amplify Credit Union s Paul Trylko CEO s Thoughtful Journey Impacts Many Lives SCOTT MCCLYMONDS Tim O Hara CEO VELOCITY MORTGAGE BUSINESS Scott McClymonds CFO CURRENCY Credit Union Fair Lending Risk in Mortgage Lending DANIELLA CASSERES Emily Hollis TECHNICALLY SPEAKING TEAM BUILDING Wayne Benson MORTGAGE BUSINESS Introducing the CUB Team Builder (on page 7) Daniella Casseres CUSO Larry Hayes LOYALTY Bethan Cowper CYBERSPACE SUBSCRIPTIONS Tom Neclerio BRANCH AUTOMATION Meredith Deen STRATEGIC PLANNING Marvin C. Umholtz THE LAW Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year Digital membership is 75 yr x 3 ( 225). An online membership form is available at register. SALES AND ADVERTISING Brad R. Bergmooser TITLE INSURANCE Pete Pearson and Matthew Rekers BRANCH BUSINESS Tim O Hara Publisher tim or 561-282-6015 1 CONTACT INFORMATION David Peterson MEMBER EXPERIENCE Patricia Tripar COMPLIANCE UPDATE Credit Union BUSINESS Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim Cindy Williams LENDING SOLUTIONS Karin Brown-Purtell 2 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M 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 t any branch con guration 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. PUBLISHERS TAB POV BY TIM O HARA T The Team Builder wo of my greatest passions are children and credit unions and I ve found a way to help both with our new subscription program appropriately called The Team Builder. The Team Builder is designed to help credit union executives by streaming helpful information directly to their inboxes. It is also designed to dedicate a generous portion of the subscription proceeds directly to the Children s Miracle Network s CU4Kids program. Credit Union BUSINESS magazine was created nearly 12 years ago specifically to help senior-level department heads run their credit unions. And we really hit the target with our regular business-related columns addressing specific job titles the Team in Team Builder. For the team leader we have CEO Velocity and View from the Crow s Nest. Savvy CFOs get expert advice from CFO Currency while Lending Solutions Marketing Matters Technologically Speaking Compliance Update and Branch BUSINESS are authored by industry experts. The intention of these columns is for the authors to share their expertise and to sharpen the skills of those executives who will benefit the most. While we ve been helping the management teams we ve also put our money where our mouth is with Children s Miracle Network. Since 2005 we ve donated pro bono advertisements in more than 100 issues of CU BUSINESS. Although I try not to brag if you were to put a dollar figure to the total it would hover around the quarter million mark because kids are more important than anybody Joe Dearborn Senior Director of CU4Kids said It s great to know that we can count on the generous folks at CU BUSINESS to help bring the finest healthcare to our CMN Hospitals throughout the U.S. Here is how the Team Builder subscription program works In exchange for a highly discounted 400 group subscription to CU BUSINESS eight members of the credit union team (including the CEO s executive assistant) will each receive a full membership to the magazine and full access to the CU Business website the home of a 55-issue library of helpful CU information. 4 C R E D I T U N I O N B U S I N E S S Here s the zinger We will send each team member pertinent columns before they are published. So the CFO will receive a new CFO Currency column authored by ALM First Advisor s Emily Hollis before anybody else in the industry. Same goes for Rex Johnson s Lending Solutions column being sent to the chief lending officer members the same day it s edited. Each team member will benefit from great information sent directly to his or her inbox at the earliest opportunity. What s more the Children s Miracle Network will receive annual payments amounting to 10 percent of the gross proceeds. You can also keep watch for the winning teams with a virtual scoreboard which will be on display on the CUB home page. A map of the USA with stars representing each participating credit union and a pull-down screen showing each CU s name logo CEO assets and members will be featured. Credit Unions for Kids is grateful to be the recipient of the proceeds raised through the CU BUSINESS Team Builder program Dearborn said. And I m grateful to the credit unions for helping me with my two greatest passions Be on the lookout for full details or call me at any time to find out more. Thanks for reading Tim O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M mobile Capable of moving or being moved readily. So are you Your members are. Your future members are. And so are your competitors. As the leading CUSO PSCU can move you forward in the way of mobile delivery. That means putting you in all the places your members are and helping you outpace the competition on the road ahead. mobile 888.918.7357 CEO VELOCITY BY SCOTT MCCLYMONDS Amplify Credit Union s Paul Trylko How a CEO s Thoughtful Journey Impacts Many Lives How did one 17-year veteran credit union CEO s leadership evolve It occurred in three distinct phases each one contributing to who he and his CU Amplify are today. Learn how to follow in Paul Trylko s leadership development footsteps to help take your credit union to the pinnacle of success. Unplanned Meeting in Denver A few months ago I was sitting in on a Big Data panel presentation at the CUNA conference in Denver. When it came time for questions one gentleman out of about 400 people came to the microphone and asked Where does Big Data fit into an organizational structure Does it belong in Marketing Finance IT I thought that was a great question and since I had led Big Data teams in banks for about 25 years I made a point to introduce myself to him after the session to provide my thoughts on the best approach. That gentleman turned out to be Paul Trylko CEO of Amplify Credit Union in Austin TX. As we conversed we realized we had some mutual acquaintances in common as well as a shared interest in leadership. Paul and I were able to follow up our introduction in Denver with a call wherein we discussed Paul s journey as Amplify s CEO as well as his advice to other credit union chief executives. Paul has been CEO at Amplify for about 17 years and his journey has been an evolution as his self-awareness has guided and pushed him to continue developing not only his own abilities but those of his Amplify colleagues as well. For those of us who believe in John Maxwell s Law of the Lid which says organizations can only grow to the level of the leader s leadership ability Paul is a great example of a CEO who has not settled in and gotten comfortable. He exemplifies one who has instead continually increased his leadership expertise. CEO Paul Trylko of Amplify Credit Union Most new CEOs approach their roles with a heavy focus on dayto-day operations and financial metrics. Many continue on this course and never leave it since it tends to fall in their comfort zone. Conversely others look to continue their professional development by expanding their leadership influence to their communities and industry associations while focusing internally on culture and leadership development. Paul falls into the latter category and views his CEO evolution in three distinct phases. 6 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY CEO Journey Phase 1 The first era was from 1998 to 2004 when the now 750 million asset Amplify was worth about 100 million. During that era the CU phased out of IBM as a single-sponsor and out of consolidated offices. At the same time it created a singular focus on the Austin market. Paul described his approach during that time period as very tactical getting things done day to day with an operational focus. During this time Amplify became a member of CUNA the Cornerstone Credit Union League and the Austin Chamber of Commerce but Paul did not play an active leadership role in any of those organizations. CEO Journey Phase 2 The second part of the evolution took place from 2004 to 2010. Amplify had grown to 300 million had a community charter and had expanded its branch footprint to be closer to Austin s high-tech community. By this point in his career Paul had become active on the Cornerstone League board and his focus became more strategic. Part of that strategy was to devote less of his time to day-to-day operations and more to external activities. Integral to that aim was the creation of two key alliances with other credit unions. The first was a surcharge-free ATM network in 2004 that began with two credit unions and quickly grew to 15. The second was a credit union service organization formed in 2005 with six other credit unions culminating in a business lending CUSO. During this second phase of the journey Paul sensed he needed to grow become more strategic and get better at what he was doing. He addressed these issues with his board s support by hiring an executive coach. While the coach was expensive Paul said it was well worth the cost because it helped him get to the next level of skill thinking leadership and vision. In fact the collaboration was so successful that three other Amplify SVPs hired coaches to help them raise the bar on their performance. union s culture and strategy and intensifying his leadership in community and industry activities. Let s begin with what Paul and his executive team have done to develop leaders. After experiencing great success with their executive coaches they decided to extend this effort to other leaders in the organization. With the help of an outside firm they created a leadership development curriculum to reach beyond their executive team to VPs and AVPs. All leaders go through the curriculum now regardless of their level in the organization. About 50 leaders have been through the curriculum to date and in addition to providing Amplify with greater leadership bench-strength the insight they have gained has fortified the culture by giving all leaders a common language and understanding of not only Amplify s leadership philosophy but also what the credit union is trying to achieve. A beautiful outcome of this process is that new managers don t have to know all the answers right from the beginning. Instead they have a strong support group to help them adjust to their new roles. When I pressed Paul on whether the investment in his own leadership development as well as those of his teammates has been worth it he emphatically responded in the affirmative. Yes it has been expensive and time-consuming but since the inception of this effort five years ago Amplify has grown to 750 million and has had its best financial performance ever. While Paul didn t attribute all the financial gains the CU has made to its leadership development efforts he believes such efforts are at least partly responsible. Overall the uniform emphasis on leadership development has helped Amplify become more strategic and better aligned two critical components in the achievement of any type of goal financial or otherwise. A Brief Coaching and Consulting Commentary I m going to put my executive coaching and consulting hat on now and make a few points about some of the steps Paul and his team have taken. It isn t all that common for executives particularly CEOs to work as hard as Paul has to not only refine their existing skills but also develop new ones. Many CEOs I have met stop their development when they reach the executive level. Looking CEO Journey Phase 3 With the first two phases as a foundation Paul has focused the last five years of his career on developing leadership depth throughout Amplify. Other areas of concentration have been getting the right people in the right seats refining the credit 7 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY again to Maxwell s Law of the Lid CEOs who stop growing and developing set a cap on what their organizations are able to achieve. They also send the message to their employees that is it is okay to be complacent. Unlike Paul and his team many CEOs would never consider hiring an executive coach to help them raise the bar on their performance. Why They re already successful and coaches are only for individuals who are having performance issues or at least that s the conventional thinking. In Paul s case he knew there was another level he needed to attain and he had the humility to access an expert to help him get there. Creating a leadership development curriculum that all managers take is incredibly insightful and very uncommon. Pentagon Federal s James Schenck is the only other CEO I have spoken with who has made leadership development such a strategic priority and in both organizations it has paid off handsomely. In contrast most credit unions do not place nearly as much emphasis on developing leaders. Most new managers have an experience similar to mine which is basically Congratulations on your new position. Let me know if you need anything. The budget is due next week and your two most senior employees just quit. Maybe that s why according to one experienced executive recruiter about 95 percent of all new CEO positions are filled from the outside. With leadership training like that how could new CEOs possibly come from within the credit union CEOs like Paul Trylko and James Schenck also understand another Maxwell euphemism which is Everything rises and falls on leadership. That phrase is packed with meaning and should be one of the guiding forces of your credit union. In our era of high-speed technology development in our search for relevance and in our quest for financial strength it is easy for executive teams and boards to put leadership development on the back burner. The thought is that leadership is a soft skill and you either have it or you don t. Friends that type of thinking is the road to mediocrity irrelevance and extinction and I urge you to take a different road one that has been proven at Amplify and a handful of other credit unions. during his third phase at Amplify he has also spent more of his time away from the credit union focusing his leadership efforts on strengthening the industry as well as Austin s economy. Paul chaired the Cornerstone League s board for three years and is engaged in various roles in Austin s Chamber of Commerce including chairing a committee. Paul sees these activities as essential ones that help credit unions participate in their communities and shape their future. He believes credit unions are part of the core fabric of their communities and that they have a vital role to play. Unfortunately the movement often lacks visibility and Paul sees his external leadership roles as a way to shine light on the ways Amplify and other credit unions can benefit communities. Not coincidentally Paul noted that the more time he spends in the community the better Amplify s financial results are. Of course having strong leaders who can run daily operations is vital to Paul being able to engage in these activities and the strong leadership depth Amplify developed over the last five years has allowed Paul to move more aggressively in this direction. The Three Phases of Paul Trylko s CEO Journey Applying Paul s Journey to Other CEOs Paul s journey as Amplify s CEO is very instructive considering the credit union grew from 100 million to 750 million during his tenure. How does Paul s story apply to the CEO of a smaller credit union today Can such executives use Paul s experience to move up the growth curve more rapidly Can they accelerate the progress of themselves their teammates and their credit union by following his path I posed these questions and a few others to Paul and here are his responses. 2 0 1 5 C U B U S I N E S S . C O M The Importance of External Activities In addition to Paul s emphasis on leadership development 8 C R E D I T U N I O N B U S I N E S S O C T O B E R CEO VELOCITY The smaller credit union really has to focus its strategy narrowly and realize it will experience an evolution over time going from almost purely tactical to strategic. It needs to develop a strategy that allows it to focus on what it does really well and expand gradually. Competency in mobile and online is a necessity and strategic partnerships with other credit unions and outside experts can help considerably in those areas as well as others like big data and analytics. A CEO s most important daily activities vary depending on where his or her organization is in its evolution but getting the right people trained and in place is critical. You need to have leadership development create an environment where people can thrive and get out of their way. Since the time Amplify was at 100 million the credit union monitored its performance dashboard regularly. It continues this watchdogging today with a one-page summary showing every manager where s he and the organization are compared to their goals. H aving a roadmap created by the board and executive team could shave time off of a CEO s development. It could also accelerate the progress of the credit union. In addition it saves time and provides greater clarity. Leaders and boards must grow adapt and evolve for the credit union to thrive. This process has to be intentional and boards must be willing to invest in their leaders. Otherwise the pressures of each day lead to strategic inertia. Paul says hiring an executive coach was beneficial for him. Be willing to innovate collaborate with other credit unions and not be afraid to dig some dry wells. Not everything will work out but take some calculated risks and try new ideas for the sake of your members. Leverage other like-minded credit unions to get economies of scale. Regardless of whether your credit union is larger or smaller than Amplify Paul s journey can help you create a better credit union. His focus on raising his level of thinking and Scott M cClymonds and CEO Velocity help financial institutions like yours increase earnings member loyalty and employee productivity. Scott has helped hundreds of CEOs and senior managers find answers and solutions to tough questions like Who are your most profitable members and how vulnerable are they to attrition Where can you find m ore of them Are they already doing business with you How does your strategy need to be adjusted to improve your results by 20% or more What technology updates will give you the highest payback How should you develop your most promising leaders Email scottm to request a free paper on how to find and close earnings gaps in your credit union. 479.263.0774 C R E D I T U N I O N scottm B U S I N E S S Scott McClymonds is one of the most creative strategists in the financial services industry. - Elio Spinello Principal RPM Consulting 9 O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY skill creates a model that everyone else on his team can follow and his commitment to developing a leadership culture can be replicated anywhere. These two areas of emphasis should be focal points for all credit union CEOs who truly understand how much the lives of other people depend on them. Next Steps for You What s next for you and your team Here are seven steps you can begin taking today to improve your credit union s performance relevance and impact. Assess your current skills and the ones you would need to take your credit union to the next level. List them and get feedback from your board and teammates to verify your ideas. Prioritize them and develop a growth plan. Consider outside experts like executive coaches to help you achieve your goals. Understand that you are in the people development business and that the future of your credit union depends on how well you accomplish this aim. Consider creating a leadership development effort within your credit union and holding people accountable for results. Identify the strengths of your employees and put them in positions that allow them to regularly maximize their talents. Think about collaborative efforts you could develop with credit unions in your market or across the nation. You don t have to do everything yourself and there are willing strategic partners with complementary strengths and philosophies. Avoid chasing fads. Understand what you must do and what you are very good at. Focus there and build. Don t try to be all things to all people. Be a strong participant in your community and industry. Such participation provides great visibility for your credit union and the movement but more importantly it shows everyone that you believe in what you are doing and the difference you are making in people s lives. Scott McClymonds is an executive coach and consultant who helps credit union CEOs raise the bar on their financial performance relevance to members and community impact. His realworld expertise in aligning leadership employees and systems to generate high-impact results helps his clients build sustainable competitive advantages. A regular speaker at conferences and a frequent contributor to credit union publications Scott has been called a pragmatic visionary and one of the most creative strategists in the financial services industry. He can be reached at scottm (479) 263-0774 or https in scottmcclymonds. Scott has more resources for CEOs at Their Loyalty. Your Revenue. INCREASE BOTH WITH SWBC Visit or call 866.316.1162 to learn more. 2015 SWBC. All rights reserved. 10 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M CFO CURRENCY BY EMILY HOLLIS CFA PARTNER Role of an ALCO board member Wondering what the role of your new asset liability management board committee member is Well wonder no more. This overview of NCUA-defined responsibilities along with a do and don t primer sets the record straight no matter which type(s) of ALCO your credit union has established. sset liability management (ALM) has been used within the credit union industry for many years but initially it was an internal process that did not involve board members. In the early 1990s ALM existed only in the form of GAP. Assumptions were simple and GAP reports could be produced using Excel spreadsheets. In the mid-1990s corporate credit unions were required to conduct income simulation and net economic value analyses in accordance with part 704 of the NCUA rules and regulations. Today NII and NEV tests are not included in the NCUA regulation for natural person credit unions but they are detailed in NCUA examiner guidelines and most credit unions will be written up for noncompliance. Today ALM systems are extremely complex with stochastic modeling capabilities that can generate multiple types of duration calculations. Assumptions include prepayment forecasts statistical measurements for non-maturing deposits and hundreds of market rates depending upon vintage term coupon and type of loan. It can get very complicated. ALM committee members will continue to be challenged as credit analyses become factored into the ALM process. Current Expected Credit Loss (CECL) accounting is on the horizon which will further emphasize the need to project credit losses on credit union loans. The Dodd-Frank Stress Test (DFAST) has placed the limelight on credit analyses integrating into ALM. ALM providers are starting to project and incorporate these losses (and shocked losses given various scenarios) into the ALM function. As credit unions welcome board members on their committee they often wonder what their exact role is. Generally A ALCO board members are responsible for directing the interest rate risk (IRR) and to a certain degree the credit tolerance of their financial institution. It is management s job to carry through the mandates of this risk philosophy and tolerance. According to the NCUA the role of the entire ALCO committee is to Identify goals and objectives. Develop strategies. Create policies and procedures. Manage product offerings and pricing. Identify measure monitor and control exposures to risk. Generate adequate income and net worth over varying economic conditions. Maintain financial flexibility. The NCUA Examiner s Guide states that credit union boards have a responsibility to oversee the ALM process and they usually delegate the day-to-day implementation to management. Further the guide cites that larger or more complex credit unions should have a well-organized ALCO with clear relevant and concise IRR management documentation. Preferably at least one board member will sit on the ALCO. Although the NCUA does not list specific duties of a board member our experience and professional skills lead us to recommend the following dos and don ts. Board ALCO members should do the following Have a basic understanding of IRR. For more complex credit unions understand sources of potential risk risk measurement techniques and risk mitigation strategies as well. 11 2 0 1 5 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S O C T O B E R CFO CURRENCY Keep the board informed. Regularly review financial statements. Know the credit union s risk position and actual performance compared to stated objectives and relative to peers. Stay abreast of current economic news. Ensure that strategies are appropriately set for the investment portfolio. Ensure that every major strategy has a supporting ALM what-if component. Ensure that any new loan or share implementation has a supporting ALM what-if component. Set and understand risk tolerance measurements. (Understanding the math behind the analytics is not necessary.) Become educated on risk management by reading educational articles or attending appropriate conferences. Review policy violations. Annually review ALM investment liquidity and concentration policies. Review and approve the ALCO s strategic goals and objectives prior to proposing to the full board. Assist in formalizing capital plans. Be committed to the process and the credit union s mission. tolerance levels (i.e. high ROA targets with low credit and IRR). Forecast or bet on rates. Balance sheet and investment strategies should be independent of rate forecasts or rate bets. Credit unions that struggle appear to cross these lines in both directions. In other words management should ensure that interest rate tolerance is agreed upon discussed and set at the board level and the board should trust management to conduct the day-to-day operations of the institution. To help delineate responsibilities more and more credit unions have now established two separate ALCO committees a Strategic ALCO and an Operational ALCO. The Strategic ALCO should meet quarterly The Strategic ALCO s primary focus is strategic development and decision making. The emphasis is on the future instead of the past. All departments and branches should be represented as well as at least one board member. At this level focus should be on the general degree of risk and what-if scenarios that incorporate future projections of risk and what might happen to the balance sheet if these events were to occur. As an example if a board member is concerned about earnings and the Strategic ALCO decides to take additional risk in holding additional mortgage loans there should be dialogue and analysis to support the decision. The committee should discuss the direction of interest rates what level of risk is acceptable what would happen if rates move in an unfavorable direction and when this might happen. A key question should be Can the balance sheet sustain such action and still be within acceptable risk parameters Board ALCO members shouldn t do the following Set rates. Allow conflicts of being a member override the fiduciary duties of a board member. (From a rate perspective what is best for the member is not necessarily what is best for the credit union.) Be closedminded of leverage strategies that could extend liability duration. Micromanage management. Spend time discussing individual member defaults. Develop strategies that are inconsistent with risk 1 The Operational ALCO should meet monthly The Operational ALCO would act on implications affecting daily operations such as rate setting and monitoring of major loan programs including delinquency product profitability cash management and promotions. The Operational ALCO should be comprised of the credit union s management staff including NCUA examiner guidelines 12 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M CFO CURRENCY CURRENCY CFO CFO CURRENCY CFO CURRENCY are calculated figures not assumptions. The have significant implication on the ALM conclusion. The of time. Credit will need to be assumptions used should be changed government bond inputs allow the user to model cash flows with an end maturitybenchmark if budget surpluses dry up thein progressive intervals branch managers and managers from the lending collections reviewed and authorized There are times where management and or even the boardand and They have already become the standard for pricing and decay rates that are and commercial departments as well as market. the output should be recalculated to determine the impact similar to amortizations. accounting mortgage is uncertain about the accuracy of the underlying weeks. this can take ALM reports. of a different assumption. Dividend and discount rates allow for the present valuemany corporate bonds. reports is imperative given that strategy executive staff. Having accurate current rates and spreads are uncertain as to If you are will Knowing calculations is where longer each modeledcan be used because development where swap the validity of this information. allow This (premiums) in ALCO reports interest rate scenario. depends on In this the many requirements of and Effective include detailed information. then committee shouldbebetter hedgingcreditinvestment execution. When investors need Conclusion unions choose toapplying and using derivatives they duration calculations can The mathematically case many have a validation which gauge compared to that of the institution s this case effectivetoincludescredit risk the ALMcan be viewed as aswapprocesses. Non-maturing of and market sentiment the and curve is identify reporting requirements such In production and a review deposits model s calculations franchise value consider becoming the more important curve to analyze.engaging an external duration is calculated by merely backing Committeeprice change Validations can be viewedfroman audit of the ALM process or benefits generated as loyalty of the membership when significant branch budget variations. into the members service provider to help you should hold dialogue on collections present value is 100 in the deposits are retained when dividend rates are low in a higher formula. For example if the liability reports and delinquencies ensuring accuracy and the strength of internal controls. They through First Financial Emily Hollis CFA is a partner with ALM the steps. loan production 100 basis point financials and comparisons base 101 in the up reports monthly scenario and 99 in the down also conduct a review of the logical and conceptual soundness market environment. And vice versa A financial derivatives Properly used institution Advisors LLC. to basis point scenario the effective duration is one percent of that offers a non-maturity dividend rate higher than market budget operational expense ratios rate settings and other a credit union s ALM model. 100 can offset interest rate risk comparable 200). (i.e. (101-99)issues. to attract hot money will decrease the economic withinofthe that is inherent value its The Operational ALCO should feed or tie into what has been For larger credit unions having model these accounts for a more a board member on the ALCO liabilities. It is imperative to is today. This competencies toStrategic ALCO. For example loan-mix strategy will aid union industryIRR measurement results to as competition dictated by the meet the final requirements. The second part credit in presenting of interest rate vital because the board. accurate depiction Sensitivity Analysis submitted when all requirements are grows derivatives can allow creditrisk. to compete more unions andset by policy and the Operational ALCO should discuss where is final application is The regulator strongly suggests sensitivity analyses as a means However knowing this member s role is imperative for an effectively. completed includingwe want contracts. we are doing to achieve efficiently run ALCO. we are today where dealer to be what to quantify the effects of changing assumptions. Sensitivity Emily Mor Hollis CFA is a partner with ALM First Financial the Setting up a line forth. dealer is similar to becoming a mix change and so at a Advisors CFA is a is a partner with ALM First LLC. analyses are essential because the core share evaluation may Emily Hollis LLC.CFA partner with ALM First Advisors Financial member of the FHLB--it can be laborious and takes a good deal Emily Hollis Advisors LLC. Exhibit 4 The outputs Some analysts view swaps as the most likely replacement for Treasury bonds as a financial benchmark if budget surpluses dry up the government bond market. 13 C R E D I T U N I O N B U S I N E S S O T O NovemberC2014 B E R 2 0 1 5 Credit Union BUSINESS C U B U S I N E S S . C O M 15 March 2014 January 2014 Credit Union BUSINESS 17 13 TECHNICALLY TAB SPEAKING BY WAYNE BENSON CEO OF EPL INC. EPL Goes Global Stays Personal How are CUSOs staying competitive in the face of today s rapid technological evolution EPL Inc. serves as a fitting case study of how one credit union service organization is staying ahead of the curve to secure its market position. Learn how constant innovation has helped the CUSO continue to serve its customers. t s no secret that credit unions are in a constant battle to meet the rising demands the industry faces today increased regulation higher costs competitive pressure succession plans and the list goes on. What is particularly troublesome is that every market forecast ultimately yields the same results membership is projected to increase while the actual number of credit unions remains on a steady decline. How do credit unions keep pace with the ever-changing industry Simple by maintaining the personalized high level of service that credit union members have come to expect as they continue to move away from the big banks in droves. The CUSOs that empower credit unions to deliver first-rate member service are an integral part of the growth of the credit union movement worldwide and not surprisingly must also fight to stay competitive as the technology landscape rapidly evolves. EPL Inc. (EPL) is one such credit union service organization. Founded in Birmingham Ala. in 1977 EPL began under the name Electronic Processors Limited and was started by Timeshare a local data center and several credit unions including America s First Federal Credit Union and Legacy Credit Union. Led by then president Robert Altman EPL grew rapidly and was sold in 1988 to Norrell Financial a division of Norrell Corporation. Just one year later EPL was again repurchased by four credit unions including the League of Southeastern Credit Unions. The 1990s and early 2000s represented a tremendous growth cycle for EPL. Technology was rapidly evolving and EPL worked furiously to stay ahead of the curve. Many other CUSOs found capital investment for growth from financial institutions EPL went a different direction its customers. By allowing its C R E D I T U N I O N B U S I N E S S I customers to become shareholders EPL strengthened the bond that built its business in the first place relationships. Those relationships yielded courageous and exciting innovations including the move in 2001 to build i-POWER EPL s core connection suite. The decision was not an easy one and it involved a significant investment of time and money. In 2004 following a 22-year career with CUNA Mutual Group I joined the EPL team as the EVP chief marketing officer. The following year I was promoted to CEO and oversaw the arduous process of converting all of EPL s customers to the recently completed i-POWER core. EPL saw many successes during that time and our customers celebrated alongside us. The unexpected market volatility caused by the crash of 2008 hit EPL and many other credit unions and CUSOs hard creating financial stresses and changes in governance. To ensure and improve its future market position EPL began the process of seeking out an industry partner a partner that not only shared its values of superior customer service but also one that believed innovation to be the foundation on which highly successful companies are built. 14 O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M TECHNICALLY SPEAKING Enter Dedagroup NA. While EPL is still credit union owned Dedagroup NA the North American subsidiary of the Italian IT services group Dedagroup ICT Network made a multimillion dollar investment a 70 percent stake early in 2015. Dedagroup NA brought not only shared values and capital assets to EPL but also over 40 years of experience serving financial cooperatives in Italy Europe and most recently Mexico. This new global perspective has allowed EPL to continue to serve its customers through constant innovation. What does constant innovation look like for a CUSO like EPL Think expanded proprietary solutions. Think strategic partnerships with premier best-in-class business partners. Think a cloud-based datacenter structure and real-time solutions. Think access to global technology assets that further strengthen EPL s core engine i-POWER . Lastly think about connections customer and member connections driven through data and most importantly human interactions. EPL s new global perspective has also created a palpable buzz among credit unions nationwide and it has already resulted in the return of former longtime customer North Alabama Educators Credit Union (NAECU) following a five-year separation. EPL provided all NAECU s custom software solutions from 1992 to 2010. But in 2010 NAECU left EPL for the same reason many small- to medium-sized CUSOs lose customers the appeal of a big box provider. Greg Olmstead CEO of NAECU quickly found that the service aspect of doing business with a CUSO was as important as the technology offering itself. Credit unions like NAECU are excited about EPL s current market position and evolving software and technology solutions. But the foundation upon which EPL was built is its ultimate selling point EPL takes its relationships with customers very seriously. North Alabama Educators Credit Union is returning to EPL simply because bigger is not always better when it comes to technology and software solutions said Olmsted. Our credit union missed the personal service of EPL. We missed the awareness of what our industry is all about. We missed the EPL team that was committed to us not just as a customer but as an industry partner. EPL s latest move to keep customers involved in the innovation process is the development of its Product Advisory Team. Since the CUSO s inception EPL s customers have been an integral aspect of the product feedback loop helping develop new strategies and solutions to enhance the member experience. The recently formed Product Advisory Team will assist EPL in creating solutions that credit unions not only want but desperately need to stay competitive in the marketplace. The first team meeting took place this September in Birmingham Ala. As the credit union industry ebbs and flows twists and turns flies and dives remember there is a reason that hardworking Americans are turning away from big financial institutions in favor of the credit union movement. That reason is the experience the experience of first-rate service the experience of being part of something greater than oneself the experience of knowing that any issue had will be met with the resolve of a real person. The commitment to a first-class experience that credit unions make to their members should be reflected in the partnerships that they forge to deliver on that promise. This demand for excellence not only will help CUSOs stay competitive but it will also help credit unions of all sizes continue to evolve in a marketplace that knows growth as well as it knows volatility. Wayne Benson is CEO of EPL Inc. 15 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M MORTGAGE BUSINESS BY DANIELLA CASSERES ATTORNEY OFFIT KURMAN Credit Union Fair Lending Risk in Mortgage Lending Is your credit union involved in mortgage lending If so a recent Supreme Court decision will likely impact the fairness of your loan practices and policies. Regular monitoring of your disparate impact risk could safeguard you against costly claims. Learn more about the importance of statistical analysis for your CU s neutrality. recent U.S. Supreme Court decision has paved the way for increased regulatory compliance risk in the mortgage lending space. Although fair lending has long been a concern for banks and credit unions the Supreme Court s June 2015 decision which confirmed that disparate impact is prohibited by the Fair Housing Act may increase the number of fair lending claims against mortgage lenders. In Texas Department of Housing and Community Affairs v. The Inclusive Communities Project Inc. a majority in the Supreme Court held that the Texas Department violated the Fair Housing Act by awarding tax credits for lowincome housing developments in predominantly minority neighborhoods. The Inclusive Communities Project a non-profit group sued the Texas Department because its allocation of tax credits disproportionately affected minority neighborhoods as opposed to Caucasian neighborhoods. The Supreme Court s recent interpretation of disparate impact as it relates to the Fair Housing Act is important because it permits fair lending claims absent a pleading of discriminatory intent. To bring a disparate impact claim a plaintiff need only claim that a lender s policy disproportionately impacts a protected class of borrowers based on race color religion sex familial status or national origin. A lender may implement otherwise lawful policies and activities however if its policies inadvertently affect a protected class of borrowers disproportionately then the lender is subject to risk of violating the Fair Housing Act. Moreover to overcome a disparate impact 16 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M A claim a lender must prove that its policy which affects protected classes is necessary to conduct its business. However it is unclear what the Court would deem a business necessity in the housing context and to what extent lenders will have discretion in determining what is necessary to operate their business. Because disparate impact claims are easy to bring and difficult to defend credit unions with mortgage lending operations must regularly monitor their disparate impact risk. A statistical analysis will help a credit union determine whether its otherwise neutral lending policies inadvertently cause disparate impact to protected classes. Particularly for credit unions with lending profiles spanning various cities states and regions it MORTGAGE BUSINESS is difficult to identify the disproportionate impact of pricing or underwriting decisions across various mortgage products and populations without statistical regression modeling. A fair lending regression model will analyze an institution s HMDA data and certain overlays such as product type and loan-tovalue-ratios to determine whether pricing or underwriting decisions are impacted by protected class designations at a statistically significant level. A fair lending analysis will produce outlier loans that should be reviewed to determine whether the underwriting or pricing decisions on those loans were based on business necessity. Such analysis will also identify any trends with particular loan officers branches or regions. Companies exhibiting disparate impact may then prospectively determine if they should change internal policies such as adjusting branch margins in pricing or loan originator compensation to control for the disproportionate effect to protected class borrowers. Fair lending issues are sometimes associated with loan originator compensation strategies because loan originator compensation is often linked to pricing margins. However credit unions must carefully structure their loan officers compensation so that compensation for transactions is not impacted by loan pricing. The Truth in Lending Act s ( TILA s ) loan originator compensation rules prohibit compensation based on terms of loans such as price. Non-compliance with loan originator compensation rules has led to a number of recent regulatory enforcement actions. Most recently in June 2015 the Consumer Financial Protection Bureau issued two enforcement actions for violations of TILA s loan originator compensation rules. One of these actions resulted in 19 million in redress and civil penalties. Lenders were fined for improperly paying their loan officers based on profits and terms of loans both of which are University of Lending May 11 - 15 Crystal Lake IL August 10 - 14 Crystal Lake IL 4th Quarter 2015 Las Vegas NV C M Y CM MY CY CMY K Management Institute for CEOs and Managers September 15 - 17 Phoenix AZ Collections Institute April 7 - 9 Chicago IL October 6 - 8 Phoenix AZ Indirect Institute May 4 - 6 San Antonio TX 17 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M MORTGAGE BUSINESS TAB prohibited under TILA s loan originator compensation rules. In one case the lender allowed its loan officers to vary their compensation based on pricing concessions and paid bonuses based on loan profits. The rules define a transaction term as any right or obligation of the parties to a credit transaction. Pricing concessions affect the borrower s obligation to pay the mortgage lender on a credit transaction and are thus terms of loans. TILA prohibits compensation based on terms of loans which could incentivize loan originators to offer mortgage terms that lead to higher compensation but may not be in the best interest of the borrower. Furthermore should a loan originator make a costly error that leads to a pricing concession a lender is prohibited from reducing the loan originator s compensation on that transaction except under very limited circumstances. The loan originator compensation rules permit a reduction in loan originator compensation only when there is an unforeseen increase in settlement cost to the consumer and when the reduction in compensation would reduce the increased cost to the consumer. It is often difficult to argue that loan originator error is unforeseen. For the same reason that pricing should not affect loan originator compensation payments based on profits are also generally impermissible. Compensation based on profits is considered payment based on terms of loans because the compensation is based on the terms of multiple transactions. Nevertheless the loan originator compensation rules provide 18 C R E D I T U N I O N B U S I N E S S an exception wherein a lender can pay its originators a bonus of up to 10 percent of the originator s compensation for the applicable bonus period. Despite this exemption credit unions must carefully structure profitability bonuses so that payments do not run afoul of the rule s prohibition on payments based on terms of loans. As credit unions revisit their policies in light of fair lending risks it is important to also consider the interplay of various regulations governing residential mortgage lending such as loan originator compensation rules. That is because federal agencies have indicated that they will consistently and aggressively enforce the regulations promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Internal controls including implementing compliant policies and ongoing compliance monitoring will be essential as the regulatory environment enhances a credit union s lending risk. Credit unions should devise controls to mitigate the risk of violating fair lending laws by carefully considering business necessity in their compensation pricing and underwriting decisions and by frequently monitoring and evaluating risk trends. C M Y CM MY CY Daniella Casseres is an attorney with the Offit Kurman law firm. Her legal practice focuses on laws and regulations governing mortgage lenders mortgage brokers financial institutions and consumer finance companies. She regularly advises clients on state and federal compliance laws and regulations including fair lending advertising licensing privacy TILA RESPA FHA FCRA and BSA requirements. She can be reached at dcasseres or (703) 745-1811. CMY K O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M With 80% of U.S. households saving coins coin processing is in demand especially at nancial institutions where most prefer to redeem their change. Give customers the means to do it themselves and you can increase their satisfaction by as much as 20%. That s the power of self-service coin counters. Now Cummins Allison gives you more ways to add coin machines to your branch. Choose from fast quiet and reliable coin counters that you can buy rent lease or place free of charge. We ll even pick up and process your coins. Coin counters are a proven way to increase traf c and member satisfaction -- let us show you how. Get a custom report comparing your self-service coin options. traf c Copyright 2014 Cummins Allison Inc. All rights reserved. CUSO BY LARRY HAYES CEO CU HOLDING COMPANY LLC Why Focus on Why Why does your credit union do what it does The answer to this question holds the key clarifying your purpose. The how and what are no longer enough. Armed with the answer to this important question your CU can begin to truly channel all its decisions actions and communications. created in 2003 by Mazuma Credit Union was formed as a holding company with a mission of developing innovative CUSOs to effectively serve credit unions and CUSOs of all sizes as well as their members and clients. At the time we began the economy was moving along and the housing market was really heating up. Within five years the banking crisis changed the game for credit unions. The increasing scrutiny of operations service providers compliance and expense management for our industry required us to reevaluate our CUSOs. We looked deeper than just at how and what we were doing we wanted to review the why we do what we do. Through this effort we are able to truly clarify our purpose which is to be of service. For instance Beyond Marketing now BYM Agency was the first CUSO developed under CU Holding. The agency s original brand message was focused around revenue and return on investment (ROI). The rationale for this messaging was to remind our credit union clients that marketing and communicating with your members should consistently be a priority but it is often the first budget line item to be reduced when income is a concern. To this day we continue to estimate and report on marketing ROI for our clients but it isn t our lead brand message. BYM Agency shares the CU Holding purpose but how it engages the industry and what it does to support it intentionally differs from other CUSOs. Our CUSOs believe in serving credit unions and CUSOs to improve the lives of their members and communities. Revenue and better outcomes for all are the result. 20 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M CU Holding Company LLC To us the general credit union philosophy of people helping people is easily distilled into the primary purpose of effectively improving our community and the people who live there. Understanding this we can begin to truly channel all decisions actions and communications. We can develop financial products and services etc. and we can deliver them in unique ways that satisfy the industry we serve. In the process we can drive the decisions and directives of each job and department within our CUSOs. Why Am I Telling You This If you believe in redeveloping or refocusing your credit union or CUSO around a lens of why you exist then the picture will become clearer on how and what you do and say each day. Of course every field of membership or market is different and although the general credit union CUSO TAB mission of people helping people is shared among all yours can be specific as to SEG or community served. Your measures of success (results) will be determined based on how well you develop organize and execute your organization s why. So let me circle back to the discussion regarding BYM Agency. Our business model was well suited for our work but how we worked and engaged with credit unions had to change. We believe that it is basic human instinct to want to work with people based primarily on why they do what they do not just what they do. So we began by changing how we approached each discussion and project. Staying true to our commitment to serve the credit union industry we learned and consulted on how each and every client wanted to serve its members. As we did so our outcomes became more than just revenue generation they became branding educational and relationship-building opportunities. These transformational experiences have positively impacted credit unions members and our own company. For BYM Agency we understand marketing alone does not truly change an organization s personality how it works and what it does. Marketing communicates to and educates others about your credit union s image. It also effectively illustrates how you improve the residents of the community you serve. When effective it connects the why you exist with what you are doing and in return it benefits the whole of the community by making it stronger. When people meaningfully understand your why they are more likely to want to become a part of it. Here are other examples of how we address our commitments to credit unions. Managing Differences within Your Community According to a recent FDIC report1 nearly one-third of the U.S. population 106 million people are either underbanked or unbanked. One in five households have zero or negative assets and 25 million have no credit score. Credit union fields of membership will have varying degrees of the un- under-banked among their residents. If we apply our why statement Effectively improve our communities and the people who live there we then consider what role a credit union should take to address this concern. If we consider as a part of the financial mainstream that personal financial success is a ladder and that each of the ladder s rungs represents an improvement in one s financial situation what person wouldn t want to be standing among the ladder s top rungs Unfortunately we believe that many traditional bank and credit union services first ladder rungs may not extend low enough for the un- under-banked to begin their credit climb and or the persons in this situation have the belief that they cannot achieve the first credit rung. I realize the fiduciary responsibility of a credit union is to the membership not individual members. However we believe that in general up to 16 percent of any particular credit union s membership may have credit scores so low that they can t qualify for any type of mainstream credit union loan. Since our CUSO s existence is to support and serve credit unions and the credit union industry we developed a CUSO service to bridge the ladder rung gap that exists between poor credit-scoring members and the credit policies of credit unions. XtraCash is a payday loan alternative that manages all of the credit risk for the credit union while serving a credit need for the member. Typical fees for our loan program are less than the traditional payday loan storefront you may find 21 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M TAB CUSO within your field of membership. Additionally members who participate in financial education programs within the credit union receive additional fee reductions for these loans. XtraCash works with each participating credit union to help them understand the payday loan market of their membership and it can provide information about these member loans to help the credit union develop its own way to solve the financial ladder rung gap. This may include defining when a member successfully pays a specific number of XtraCash loans appropriately so that member may now qualify for a traditional creditrebuilding signature loan or credit-limited credit card. This can help your members transition into mainstream financial services rebuild credit scores increase member participation and loyalty and remove them from a cycle of payday lending activities. In effect it can improve the lives of people within your community and potentially eliminate the need for the CUSO and payday loans in the future. Protect My Community s Assets Although the percentage of uninsured motorists has dropped in the last 20 years it is still estimated that the average rate of uninsured motorists remains above 12 percent.2 Even with the reduction in percentage of uninsured motorists over this time the claims related to this problem grew by 75 percent to more than 2.6 billion over the past decade.3 Some states like Oklahoma Florida and Mississippi along with a few others have uninsured rates estimated at more than 20 percent. Again if we follow the idea that we are to improve our community and the lives of its residents wouldn t it be wise to find ways to reduce the number of uninsured drivers within our community for the sake of its residents and credit union members Might it also be wise to ensure that we protect the risks of our financial cooperative by providing affordable insurance options that cover the assets for which we may hold the loans CU Holding created MemberInsure to provide a widerange of coverage options and pricing in an effort to identify personal coverage opportunities for nearly every auto driver home homeowner business business owner and member of the credit union with property and casualty life and small business insurance. We do this through a multitude of independent insurance carrier appointments that allow us to cover a varying range of risks associated with any community. We want to be the insurance CUSO that can always find an insurance carrier and policy that will cover members specific needs at the best possible price. We prefer to never turn any member away. At Home in My Community The average rate of homeownership has dropped 3.5 percent since 2008. More problematic is that homeownership for persons under age 35 has dropped five percent to 35.3 percent in the fourth quarter of 2014.4 Homeownership can be a significant asset investment for community residents and is known to improve resident outcomes across a wide range of health and academic issues. The children of homeowners are more likely to Their Loyalty. Your Revenue. INCREASE BOTH WITH SWBC Visit or call 866.316.1162 to learn more. 2015 SWBC. All rights reserved. 22 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M TAB CUSO stay in school and have higher test scores. Children of homeowners are less likely to have behavioral problems and have lower rates of teen parenthood. The children of homeowners are also less likely to suffer from asthma and have better physical health in young adulthood.5 Additionally the average age of many credit unions members remains relatively high at 47 an increase over the past several years. From the statistics provided earlier on homeownership the first-time homebuyer is now about 30 years old.6 If we haven t provided first-time car buyer loans by the time your community residents are in their 20s the next big opportunity to connect with this age group is at the time of home purchase. We need to actively try to serve them. Loans drive the bulk of a credit union s income to preserve its longevity. An aging membership base is not a sustainable prime-lending demographic. It is in the best interest of the credit union to maintain and improve lending and to provide affordable real estate credit for its membership and community. For us providing homeownership opportunities for credit union members was an easy choice. In the previous decade CU Holding helped capitalize TruHome Solutions LLC by investing in the CUSO. TruHome makes it as easy as possible for a credit union to offer a full line of mortgage loans from origination to servicing and titling. These mortgage loans can be placed on the credit union s portfolio or if the credit union does not want to manage real estate long-term lending risks the mortgages can be sold on the secondary market. CUSOs like TruHome create viable home-lending solutions to credit unions that either don t have a mortgage loan program or are looking to improve operational efficiencies by outsourcing this heavily regulated service. Forbes and FDIC Report 2013 Insurance Information Institute 2012 3. Insurance Research Council 2012 4. 4. U.S. Census 2014 5. National Housing Conference 2012 6. Filene Institute 2012 & NAR 2008 1. 2. To Be of Service When I meet credit union industry employees across the country I am always re- energized with the credit union spirit and the movement s philosophy. I am reminded that no matter how good a credit union s vision mission or other organizational mantra is it is the people within the credit union who will make it truly happen. I am convinced there is no substitute for engaged active and impassioned staff. There is no brand message product service or commitment a credit union can successfully deliver without the full engagement of the people who are responsible for it. When your employees understand why you exist and how you plan to do it they will help craft and deliver what you do on a daily basis. I am inspired to consider new ideas to solve old new and future problems. I want to find and develop solutions and give back to the movement I have been a part of most of my professional life and that has given so much to me my coworkers and members across the country. Since becoming CEO of CU Holding Larry Hayes has proven that he is a true change agent. With his vision casting the CUSOs that are a part of CU Holding have transformed into industry-changing organizations. Larry fills any white space within credit unions and develops solutions to better serve their needs. The most recent example of this was the creation of MemberInsure a CUSO formed to help credit unions provide auto home and life insurance to their members. Larry s career spans over 28 years working in and for credit unions including serving at the executive level in several credit unions nationwide. He is a graduate of Ferrum College in Virginia with a Bachelor of Arts in General Studies Theater Philosophy and thereafter pursued his MBA in Government and Business Administration from George Washington University. 23 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M LOYALTY BY BETHAN COWPER HEAD OF MARKETING & PR What Is the Future for Credit Unions and Loyalty Has your credit union been accused of playing it too safe in terms of innovation Turns out that may not be such a bad thing. Read on to find out why the customer loyalty of the future hinges on a consistent individual experience rather than innovative technology and why that s good news for CUs. n the United States today the focus on disruptive players in the payments space has hit a steep upward trajectory. Mobile handset manufacturers and smaller niche players are labelled as innovators who are at the forefront of technology and by association the consumer experience. Reveling in the publicity they receive disruptors are increasingly being named as the reason big banks and credit unions are losing the payments popularity contest. They are also bearing the guilt for the subsequent demise of the bank branch. The solution to the issues all financial institutions face today is customer loyalty. Everyone knows that the key to consumer retention is not necessarily technology. Rather it is the ensuing first-hand experience on an individual level although ultimately on some level the two do combine. Is technology strong enough to change consumer behavior Or does loyalty lie deeper than this disruptive hurdle Credit unions aren t seen as leaders in the innovation game and they are often chastised for playing it safe. However according to findings released in 2014 by the American Customer Satisfaction Index (ACSI) Americans who use credit unions as their primary or sole financial institution are significantly more satisfied with their experience than those who use established brick-and-mortar banks. Research carried out by Bain & Company found that more than one-third of bank customers bought a financial product from a competitor over the last year whilst credit union membership growth broke records in 2014 (ACSI). Credit I unions might not be ahead of the bell curve in the technology stakes but clearly loyalty is about a lot more than being cutting edge. Financial institutions are increasingly looking at service quality customer experience trust and loyalty to maintain and grow their positions in the marketplace. Relying on brand and the associated products and services is a passive approach and it is detrimental to maintaining the level of consumer retention financial institutions have achieved historically. In 2014 the Chicago Booth Kellogg School s Financial Trust Index found that trust in credit unions is at 60 percent whilst trust in big banks is only 30 percent so credit unions are comfortably ahead. 24 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M LOYALTY TAB A recent survey carried out by Filene Research Institute found the top three requisites for members between the ages of 18 and 34 to be Good customer service and respect Ease and convenience Advice and guidance through situations Whilst credit unions certainly seem to have the monopoly on good customer service as well as guidance and advisory services according to Filene Research Institute banks are the leaders in offering convenience. As banks begin to up their game and strategically become more customer-centric credit unions need to retaliate and become more user friendly. Credit unions have taken the top spot in financial services satisfaction for each of the seven years in which they have been included in the ACSI. However with the rise of the tech-savvy Millennial ease and convenience are becoming increasingly important and CUs need to jump on the bandwagon if they want to maintain and grow market share. Ease and convenience go hand in hand with technology and this is where the omnichannel experience comes in. Omni-channel isn t just about offering a consistent experience across all channels it is about understanding your members and both reacting to and anticipating their needs. Looking at the credit union strategic business models that are already in place omni-channel is the natural evolution to providing a superior member experience. millennials A generation marked by increased use of social media and digital technologies. Would this ad matter to the generation that can make or break a brand within a few keystrokes These digital natives are the current prime target for credit unions everywhere and PSCU has the social media tools and insights you need to reach them in a way that s relevant. The leading CUSO for 30 years we know a thing or two about embracing change and having conversations that matter. Let us show you how. 888.918.7357 25 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M LOYALTY Often misunderstood misrepresented and labelled as an expensive and unobtainable goal omni-channel gets both over-praised and disregarded too quickly without exploring the simplicity of the concept a consistent experience. At a very basic level this can be about messaging making sure the brand and what it stands for is articulated across all available channels from the ATM to staff Internet to mobile. At a more sophisticated level it includes the graphical user interfaces and layout of products and services regardless of device or terminal expanding into cross-channel usage whereby a member can use multiple channels to perform one action. The meaning of a personalized experience has changed a lot over the last decade and with the advent of new technology the breadth of expectation is continuing to grow. Ensuring a consistent experience across channels is a great way of enforcing your brand and making time and location of member interaction obsolete. Bain s Loyalty in Retail Banking survey of 83 000 consumers in 22 countries which was carried out in 2014 found that over half of those surveyed used both digital and physical channels. It also revealed that the more omni-channel the consumers the more satisfied they were with their financial institution. The report cited mobile as a key channel for the future of loyalty as well. Credit unions are in a very strong position when it comes to the loyalty of their members. Whilst banks dominate the rewarding loyalty landscape credit unions have the most loyal customers. With differentiating features such as quality of staff and a more personable approach to financial services credit unions are more than equipped to satisfy the members of today. However steps need to be made to ensure the loyalty of the younger member base and a plan must be conceived to engage with them sooner rather than later. As credit union membership criteria become more inclusive and expand the boundaries of eligibility and as the marketplace becomes more social media saturated word of mouth is becoming increasingly important for member referrals. Whilst credit unions are sitting pretty in the loyalty stakes it is important not to become complacent. Mapping and prioritizing what is most important to your members is essential to long-term success. Are credit unions and loyalty a perfect match Well nearly. Taking the natural next step toward an omni-channel approach could be the key to maintaining and growing the next generation of loyal members. Bethan Cowper is the Head of Marketing and PR at Compass Plus a company that offers comprehensive integrated and flexible payment and retail banking software to payment service providers and financial institutions worldwide. In this role she leads the strategic global marketing efforts of the company from the Nottingham office in the UK. Prior to Compass Plus Bethan worked in a number of senior marketing roles covering brand management product marketing and global campaign management in the financial services IT and publishing sectors. 26 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M CYBERSPACE BY TOM NECLERIO SVP OF CYBER CONSULTING BAE SYSTEMS APPLIED INTELLIGENCE Four Questions Credit Union Employees Need to Ask to Combat Phishing Scams Think your credit union has enough cyber security measures in place to render you soundproof. When it comes to vulnerabilities you might be overlooking the obvious your CU s employees. Learn why phishing scams could have your team inadvertently opening your credit union to attack and how to prevent such threats with this trifecta of arsenal. ata breaches and cyber security threats at major financial institutions continue to make headlines wreaking negative economic impact and causing significant reputational harm for victims. While these stories point to missed security steps or insecure data practices the reality in cyber security is that a company s employees can often be an overlooked point of vulnerability. In many cases it isn t an employee acting maliciously. Instead it s a simple user error that opens the floodgates for thieves. The annual Data Breach Investigations Report from Verizon shows that employees open roughly one in four phishing e-mails that make it into their inboxes. The report also says that roughly 10 percent of recipients will open an attachment. For credit unions many of which are unable to implement the expensive cutting-edge cyber security technologies the big banks have in place these numbers can be alarming. However credit unions can use a combination of technology employee education and ongoing testing to better identify and remediate the phishing threat. To understand the challenge facing credit unions it s important to recognize exactly what a phishing scam is and what it s meant to accomplish. Generally phishing e-mails are malicious attempts to collect personal information and or employee credentials that would give a thief access to the target s network. Many credit union employees probably recognize that C R E D I T U N I O N B U S I N E S S D an e-mail from a Nigerian prince asking for their bank account information is a scam. What they may not realize however is the level of targeting and sophistication that thieves employ today in order to use the same type of scheme. Today s cyber attacker can use information available from a simple Google search or reconnaissance across a Twitter Facebook or LinkedIn profile to gather information for increasingly personalized cyber attacks. Some common approaches to phishing include sending official looking e-mails that appear to be from the credit union s IT department. Recreating letterhead with a basic art program and Google Image search takes only a few moments. From there thieves might use a credit union s LinkedIn page to identify employees who might have access to certain information such as client data or authentication codes. For example would a teller be able to access more customer information than someone in marketing Combating the problem is no small task but credit unions can make major strides to limit the effectiveness of phishing attempts through a combination of training technology and ongoing testing. Employee education delivered through ongoing training exercises can help credit union professionals react more conscientiously in the face of a phishing attack. Importantly training alone does not expose an employee to real-life situations. The first time an employee is exposed to a phishing e-mail should not be in a real-life scenario. In fact 27 2 0 1 5 C U B U S I N E S S . C O M O C T O B E R CYBERSPACE staff should be so used to being tested that they are trained on what to look for. Then the lessons learned from the testing can be incorporated into future incident response plans. Following are four best practice questions that credit unions can incorporate to make their training programs technology parameters and ongoing testing plans more effective. Do I understand the context of this e-mail Employees should look at e-mails with a critical eye identifying whether the message is unexpected and if the content is consistent with their job responsibilities. For example would someone in marketing receive a note asking about various compliance issues Is a teller expected to have knowledge of social media initiatives If the context of the e-mail is misaligned with the employee s roles and responsibilities a red flag should be raised. Is there anything strange with the content of this e-mail Employees should be on the lookout for e-mail content that requires an action to click on a link or attachment from an unknown user or that requests transmission of sensitive information or funds. Does the composition of the e-mail make sense While cyber attackers have become increasingly sophisticated a strange layout or noticeable spelling and grammar issues can also be a red flag for a potential phishing e-mail. Do I know the communicator Finally credit union employees should ask whether the e-mail has come from a familiar colleague partner or member of the credit union or if it is from an unknown recipient. An e-mail from someone the individual does not know or with whom he or she does not regularly communicate should also raise alarm bells that something could be amiss. The four questions above should be included in every credit union employee training program to help mitigate the risks associated with phishing scams. Employees understanding of the training should be determined via ongoing simulations to familiarize them on how to react in a safe controlled environment. These questions can then be expanded on by technology solutions that analyze e-mail threats and provide additional alerts when anomalous activity is detected. To demonstrate the impact of this approach Cabrillo Credit Union provides an eye-opening example of a holistic security approach. San Diego Calif.-based Cabrillo Credit Union is a 28 C R E D I T U N I O N B U S I N E S S regional CU serving more than 25 000 members across the country. Its primary goal is to act on behalf of its members providing superb customer service while cultivating loyalty. While regional financial institutions such as Cabrillo face the same regulatory pressures and data security threats as mentioned earlier smaller credit unions often lack the resources that larger banks have to secure their critical infrastructure. A CTO at a small credit union can be responsible for managing everything from Exchange to setting up spam filters at the desktop level. Cabrillo realized that a centralized multilayered cloud-based network security and e-mail security solution that would allow the organization to reduce the time and effort spent on security and compliance issues was the key to success. The company started with firewall management and after quickly realizing the benefits of using a proven SaaS delivery model expanded its program to include messaging and network security needs. The use of a technology solution in combination with a partner to help oversee the execution of its employee training program was critical in future-proofing Cabrillo s e-mail security approach. Small and large credit unions can learn from Cabrillo s example and assess their employee risk related to e-mail phishing. By combining a robust employee training program with powerful technology credit unions can better combat today s sophisticated phishing attempts and secure their organization and members. Tom Neclerio is Vice President Commercial Cyber Consulting Services for BAE Systems Applied Intelligence a division of BAE Systems. He is responsible for developing implementing and overseeing cyber security for the company s corporate clients worldwide. In this role Neclerio draws on his 17-year career in IT audit and risk analysis information security and technology during which he has provided guidance to various Fortune 500 companies and government offices including the U.S. Federal Reserve and the U.S. Treasury. Neclerio previously held the position of Chief Information Security Officer of SilverSky now a part of BAE Systems Applied Intelligence where he was responsible for the everyday operations of SilverSky s internal security and compliance program. 2 0 1 5 C U B U S I N E S S . C O M O C T O B E R STRATEGIC PLANNING BY MARVIN UMHOLTZ The 2016 Strategic Stink Bomb Repricing the Risks of Credit Union Deposit Insurance F ollowing seven years of a sluggish economic recovery it s no surprise that when a credit union s management team and the board of directors convene for an in-depth discussion about their 2016 strategic and operational plans the news of their institution s meager net interest margin induces everyone to hold their respective nose. The same can be said of these leaders reactions to the high costs for regulatory compliance that are such an impediment to profitability and that are such a distraction from the organization s preferred focus on its member-centric services. These are what I often call strategic stinkers since the absence of easy solutions for these dilemmas usually result in uncomfortable planning conversations. However when considering each federally insured credit union s strategic and operational planning for 2016 and beyond there looms a hard-to-ignore fiscal stink bomb that will undermine even the most successful organization s bestlaid plans. Each credit union s costs for insuring its shares (deposits) with the National Credit Union Share Insurance Fund (NCUSIF) and its costs for licensing the tag-lines that the credit union members deposits are... insured by the National Credit Union Administration (NCUA) and are... backed by the full faith and credit of the United States government will soon increase substantially. NCUA s 2013 White Paper National Credit Union Share Insurance Fund Improvements A little-known 2013 NCUA White Paper surfaced publicly during the second quarter of 2015 but it has received less attention than it should. The White Paper made the case that the NCUSIF should transition towards a bank-like deposit insurance fund structure. The NCUA document said Two enduring lessons of the recent financial crisis are the critical importance of well-funded deposit insurance systems to maintain financial stability during times of stress and the establishment of appropriate incentives for financial institutions to mitigate risk. Under current law the National Credit Union Administration (NCUA) does not have the appropriate flexibility necessary to manage the National Credit Union Share Insurance Fund (NCUSIF) in a manner consistent with the growing size and complexity of the credit union industry as well as financial stability goals. This paper outlines the need for legislative reform that will more closely align the operations of the NCUSIF with the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (FDIC). The White Paper also said The size of the NCUSIF is governed by a statutory prohibition on collecting premiums from federally insured credit unions when assets in the NCUSIF exceed 1.3 percent of insured deposits. Moreover because 1 percent of the 1.3 percent is in the form of contributed deposits from insured credit unions and because those deposits also contribute to the net worth of the credit unions themselves 29 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M STRATEGIC PLANNING NCUA s ability to deal with a major insurance event without transmitting losses throughout the credit union system is limited. To the extent demands against the NCUSIF exceed the retained earnings portion of the NCUSIF (0.3 percent of deposits) insured credit unions are required in accordance with applicable accounting rules to reflect the impairment in their NCUSIF deposit. This impairment would in turn be reflected in credit union earnings and subtracted from net worth. NCUSIF Statutory Reforms Recommended to Congress Additionally the White Paper said To address these imbalances NCUA seeks changes to the Federal Credit Union Act to provide greater flexibility in administering the NCUSIF including higher thresholds for the operating level of the NCUSIF and the authority to assess risk-based premiums. The other changes being sought in the White Paper were that the Congress should Authorize the NCUA Board to set the NCUSIF s normal operating level through the rulemaking process without a statutory ceiling and at not less than 1.2%. Remove the limitation on assessing NCUSIF premiums when the equity ratio exceeds 1.3%. Authorize the NCUA to calculate NCUSIF premiums based on an insured credit union s assets rather than on insured shares (deposits). Authorize the NCUA Board to develop a variable premium system based on the probability that the NCUSIF will incur a loss at the credit union. In setting premiums the NCUA Board should also be able to take into account the likely amount of any such loss as well as the current and projected revenue needs of the NCUSIF. The system should be sufficiently flexible to enable the NCUA Board to establish separate risk-based premium systems for credit unions by asset size and other criteria. The FDIC s new approach has been summarized by bank analysts as being unlike the current premium assessment calculations that reflect only the bank s CAMELS ratings and certain simple financial ratios. The new premium rates reflect the bank s net income non-performing loan ratios OREO ratios core deposit ratios one-year asset growth and a loan mix index. The new premium assessment rates are subject to caps for CAMELS 1- and 2-rated institutions and subject to floors for those institutions that are not in good regulatory standing. Rapid growth other than through merger or failed-bank acquisitions raises premium costs. Under the current law big banks pay relatively more than banks under 10 billion in assets for federal deposit insurance coverage. All banks pay risk-based premiums based on assets and banks are funding the DIF at a level such that the DIF reserve ratio of the fund to covered deposits grows to 1.35 by September 30 2020. The FDIC engaged in a historical analysis of how high the reserve ratio would have been to have maintained both a positive balance and stable assessment rates from 1950 through 2010. The FDIC Board s Chairman characterized the FDIC s entire approach to deposit insurance as forward-looking. And anyone doubting the U.S. Congress commitment to forwardlooking risk assessments need only read the June 2015 U.S Government Accountability Office (GAO) report (GAO-15-365) entitled Bank Regulation Lessons Learned and a Framework for Monitoring Emerging Risks and Regulatory Responses. Many bank supervisory examination and deposit insurance practices that were acceptable pre-financial crisis are now viewed as inadequate and insufficient. NCUA s Copycat Model for the NCUSIF Back on June 16 2015 the FDIC Board proposed a rule affecting how banks under 10 billion in assets were to be assessed premiums for federal deposit insurance. The FDIC Board s stated purpose was to improve the risk-based deposit insurance premium assessment system applicable to small banks (defined as under 10 billion in assets) to more accurately reflect risk. 30 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M STRATEGIC PLANNING Forward-Looking Risk Assessment Determines Premium Price The FDIC determined that the DIF reserve ratio would have to have been approximately 2% or more before the onset of the 1980s and 2008 crises to maintain both a positive fund balance and stable assessment rates assuming in lieu of dividends that the long-term industry average nominal assessment rate would have been reduced by 25% when the reserve ratio reached 2% and by 50% when the reserve ratio reached 2.5%. The FDIC Board has the authority to uniformly adjust rate assessments up or down without further rulemaking but the adjustment cannot exceed 2 basis points. The FDIC Board s changes to the established small bank risk-based assessment system are intended to further the goals of reducing the cross-subsidization of high-risk institutions and to help ensure that banks that take on greater risks will pay more for deposit insurance. By incorporating newer data from the over 500 banks that had failed since the end of 2007 as well as including the hundreds of failures during the banking crisis of the late 1980s and early 1990s the FDIC also claims to have developed a reliable statistical model by which it can estimate the likelihood of a bank failure within three years. Whether the NCUA would choose to apply the FDIC s methodology or devise its own to apply to federally insured credit unions has not been made clear. Regardless larger complex credit unions would pay relatively more. Bottom Line NCUA s Planned NCUSIF Changes Will Be Costly for Credit Unions The FDIC-like risk-based premium assessment on assets with a NCUSIF reserve ratio of 1.35% by September of 2020 and a reserve ratio ultimately in the 2.00% to 2.50% range is the NCUA s end-game objective paid for by each federally insured credit union. Not many credit union leaders have thought very much about this strategic stink bomb. However they should consider the potential impact on the credit union s net earnings of the costs of simultaneously building the NCUSIF reserve ratio with a new higher risk-based premium expensing the current 1% NCUSIF deposit and keeping up with the FDIC s DIF s reserve ratio past 2.0%. Add in the unknowns associated with the ultimate outcome from the Temporary Corporate Credit Union Stabilization Fund that still owes the U.S. Treasury over 2 billion and the unknowns underpinning the NCUA Guaranteed Notes and the leaders at a federally insured credit union will once again hold tightly to their nose. The potential that such a significant change in the NCUSIF s costs at a point in time when it is impossible to image operating without deposit insurance requires major strategic soul-searching. Each federally insured credit union s leaders have a room-full-of-skunks-magnitude fiscal strategic stink bomb to contemplate for 2016. Each of them must hold that nose and engage in what-iffing the strategic scenario of potential NCUSIF reform. Political Realities of Keeping NCUSIF From each consumer s point of view bank and credit union federal deposit insurance programs coverages are virtually the same. However they are structured very differently as the White Paper delineated. What was not emphasized in that White Paper was that the NCUSIF actually has a super-priority lien on every federally insured credit union s entire net worth if required to fund NCUSIF losses. The systemic risk hardwired into the NCUSIF has been criticized by the GAO as far back as 1991 (GAO GGD-91-85) and as recently as 2012 (GAO-12247). The potential liability to the... full faith and credit of the United States is politically unacceptable today. Such an arrangement will not be allowed to endure unaltered by Congress or by the administration. The Congress is extraordinarily polarized yet there are a few narrow issues about which the 31 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M STRATEGIC PLANNING lawmakers do largely agree. Since the 2008 financial crisis the majority of Republicans and Democrats agree that there should be no more bailouts for financial institutions. They agree that more capital should stand between losses and the deposit insurance funds so banks and credit unions have risk-based capital expectations as part of their regulatory regimes. Additionally both political parties want to protect taxpayers from funding bailouts so the federal deposit insurance funds have been under constant pressure to get stronger. NCUSIF reform is consistent with that statutory trend. Just how long will any lawmaker or any administration executive regardless of political party affiliation consider it wise to allow credit unions to offer the same U.S. governmentbacked deposit insurance to consumers as banks while holding so much less of a protective reserve ratio standing between loss and a taxpayer bailout And few lawmakers will feel comfortable with the double-counted 1% deposit structure of the NCUSIF s reserve ratio. The Congress and the federal bureaucrats are notorious for mispricing risk but an underpriced NCUSIF full faith and credit equates to an unpopular taxpayer subsidy. This is a strategic consideration of great importance that absolutely must be tackled by each credit union s leaders. It will be more costly to ignore it than to deal with it head on. And remember the last forecasts about looming strategic stink bombs were the many pre-debacle GAO reports that urged reforms to the corporate credit union system. Those GAOrecommended reforms were universally rejected or simply ignored. That ignorance wasn t bliss. Doing the strategic due diligence now on the NCUSIF reforms might strategically save a bundle in the future. Marvin Umholtz is President & CEO of Umholtz Strategic Planning & Consulting Services based in Olympia Washington. He is a 40-year financial services industry veteran who has held many leadership positions with credit union organizations and with financial services industry vendors during those years. marvin.umholtz pub marvin-umholtz 10 909 bb9 Political Cost of Ignoring Strategic Stink Bombs At some point between now and 2020 the FDIC s DIF s reserve ratio will be 1.35%. There will be a significant political cost for every credit union if the NCUSIF s reserve ratio does not match the DIF s reserve ratio or does not keep pace with the DIF s reserve ratio as it climbs higher past 2.0%. Their Loyalty. Your Revenue. INCREASE BOTH WITH SWBC Visit or call 866.316.1162 to learn more. 2015 SWBC. All rights reserved. 32 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M THE LAW BY BRAD R. BERGMOOSER FREEBORN & PETERS LLP The Supreme Court Talks about Stripping Strip offs and strip downs may be something you d expect to hear in burlesque circles not credit union circles. The terms however are important ones for CUs that deal with bankruptcy issues. Learn the difference between the two and what the law has to say about them. the title of this article may be somewhat misleading but the Supreme Court did in fact recently decide a case involving stripping ... lien stripping that is. In Bank of America N.A. v. Caulkett the Court prohibited a debtor in a Chapter 7 bankruptcy from stripping off a completely underwater second mortgage. While the law is settled and does not allow a debtor to strip down a second mortgage in a Chapter 7 the Supreme Court s recent ruling takes a unique approach to analyzing the Bankruptcy Code in order to extend the prohibition to strip offs. This example will help clarify strip offs and strip downs Strip Off The debtor files for relief under Chapter 7 of the Bankruptcy Code. At the time of filing his home is worth 200 000. There are two mortgages on the property a first mortgage with a balance of 225 000 and a second mortgage with a balance of 100 000. Based on these facts the value of the property wouldn t be enough to satisfy the first mortgage so the debtor would attempt to strip off the entire second mortgage from the property and eliminate it from debt owed by the bankruptcy estate. These were the circumstances the Supreme Court ruled on in Caulkett. OK mortgage from 100 000 to the amount left over after satisfying the first mortgage ( 50 000). The Supreme Court ruled in 1992 to prohibit strip downs (Dewsnup v. Timm). What the Law Says The fate of underwater second mortgage lenders in Chapter 7 bankruptcies hinges on the interpretation of only a few words in the Bankruptcy Code. Section 506(d) states To the extent that a lien secures a claim against the debtor that is not an allowed secured claim such lien is void. Translated from Bankruptcy Code language into normal English this means that a loan (the claim ) in place when the debtor filed bankruptcy will be part 33 Strip Down Use the same facts as above but change the balance of the first mortgage to 150 000. The value of the property would pay off the first mortgage with 50 000 remaining to apply to the balance of the second mortgage. This is an example of a strip down the debtor would ask the bankruptcy court to reduce what s owed on the second C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M TAB LAW THE of the bankruptcy estate and will be paid from the proceeds if it is an allowed secured claim. Claims are generally permitted under the strip off facts discussed above so discussion of whether they are treated as allowed under the Bankruptcy Code isn t an issue. The major problem is whether a second mortgage should be considered secured when the value of the property isn t enough to satisfy the first lien. Section 506(a) of the Bankruptcy Code states that a claim (a loan in place when the debtor files bankruptcy) is a secured claim to the extent of the value of such creditor s interest in ... such property but it is an unsecured claim to the extent that the value of such creditor s interest ... is less than the amount of such allowed claim. Once again translating the Code into comprehendible phrases it seems that the law would allow a loan to participate in the bankruptcy and not be stripped off only if there were at least some value in the collateral to support the loan. What the Court Said Despite the definitions in the Bankruptcy Code providing that a loan is not an allowed secured claim if there is no value in the collateral to cover what is owed the Supreme Court ruled against the debtor and his claim to strip off a completely underwater second mortgage. How did the Justices come up with their opinion The answer lies in the Dewsnup case decided over two decades earlier involving strip downs. Although the normal procedure for deciding cases is for judges to read and then apply the law to the facts the Court in Caulkett said it had already interpreted the term secured claim in Dewsnup so it wasn t going to analyze it again. FREEBORN S CREDIT UNION INDUSTRY TEAM o ers a full range of legal services to credit unions and credit union service organizations to address and manage the complex challenges facing the financial institutions industry. To account for the full range of business needs of credit unions Freeborn s Credit Union Industry Team delivers a broad range of legal services including Regulatory and Legal Compliance General Corporate Representation Commercial Finance Board Governance Real Estate Services Labor and Employment Vendor Contract Representation Intellectual Property Counsel Investments within ICUA and FCU Parameters Mergers Commercial Lending and Bankruptcy Insurance and Charter Conversions Risk Management Send an email to CreditUnionsCommittee to subscribe to our legal newsletter. CHICAGO 311 South Wacker Drive Suite 3000 Chicago IL 60606 (312) 360-6000 (312) 360-6520 fax 34 C R E D I T U N II O N U N O N BB UU SS I I N EE SS SS N S E P T E M B E R O C T O B E R 22 0 1 5 0 1 5 C U B U S I N E S S . C O M THE LAW TAB In Dewsnup the Supreme Court didn t allow a Chapter 7 debtor to strip down a second mortgage to the value in the property remaining after the first mortgage was paid off. Its reasoning was that an allowed claim (defined under a different section of the Code) secured by a lien with recourse to the underlying collateral doesn t fall under analysis of the secured claim reference in Section 506. Said a better way the Court in Dewsnup defined a secured claim as a loan secured by an interest in the property regardless of its value at the time of the bankruptcy. Therefore a debtor couldn t reduce the balance of the loan by using the equity in the property after paying off superior loans. Since the meaning of a mortgage-related secured claim was resolved in Dewsnup for strip downs the Court decided to apply the same construction of the term to strip offs in the Caulkett case. Reading both decisions together a second mortgage cannot be stripped off or stripped down in a Chapter 7 bankruptcy. Brad R. Bergmooser is Senior Counsel at Freeborn & Peters LLP and a former Assistant General Counsel for Illinois Credit System. He is a member of the firm s Corporate Practice Group and Credit Union Industry Team and concentrates his practice on matters involving credit unions and other financial institutions. He can be reached at bbergmooser What It Means for Second Mortgage Lenders The Supreme Court s decision to prohibit strip offs benefits lenders holding second mortgages in two ways. The obvious is that should they be involved in a Chapter 7 bankruptcy their second lien isn t automatically wiped out. If the property regains value prior to sale the possibility of payment from the proceeds would remain. Another benefit from the opinion in Caulkett is the idea that courts shouldn t engage in the practice of valuing collateral. The difference between a strip off and a strip down could be very minimal and the Court recognized the inherent unfairness and arbitrary results that could stem from picking a value for collateral that exists in a fluctuating market. By prohibiting strip offs the Court is allowing second mortgages to continue under its terms with the market determining the amount collected. So what should a credit union do in the wake of this decision Nothing really. It s important to understand what the Court did and what it means for second mortgages in bankruptcy but it shouldn t impact already sound reliable and successful underwriting standards and real estate lending policies. Their Loyalty. Your Revenue. INCREASE BOTH WITH SWBC Visit or call 866.316.1162 to learn more. 2015 SWBC. All rights reserved. 5540-1305 CUB 0915 35 C R E D I T U N II O N U N O N BB UU SS I I N EE SS SS N S E P T E M B E R O C T O B E R 22 0 1 5 0 1 5 C U B U S I N E S S . C O M TITLE TAB INSURANCE BY PETE PEARSON AND MATTHEW REKERS A Title Industry Framework Assists Credit Unions with Vendor Risk Management The issuance of ALTA best practices is assisting credit unions in protecting their customers personal information. Nevertheless the burden still falls on mortgage lenders to ultimately determine what is deemed acceptable when it comes to third-party compliance. What does all of this mean for your CU Read on to find out. or many years credit unions have been subject to statutory and regulatory obligations to protect their customers nonpublic personal information. However the Consumer Financial Protection Bureau (CFPB) recently released Bulletin 2012-03 which restated and further emphasized the importance of those obligations especially in the context of relationships with thirdparty vendors such as those providing title insurance and settlement services to the lender s clients. Many compliance officers have responded to the CFPB s requirements by increasing their efforts to perform due diligence on title companies. The type of due diligence used has been inconsistent with some credit unions asking vendors to complete questionnaires others requesting vendors to submit their policies and procedures and still others conducting interviews and onsite visits. These due-diligence processes have proven to be burdensome and inefficient for the lender and the title company. Beyond the establishment of these voluntary best practices ALTA also has proposed that title companies obtain certification by an independent third party to demonstrate their compliance with ALTA Best Practices. While the development of the ALTA Best Practices Framework (ALTA Best Practices or Best Practices) is new to the industry from an operational standpoint many title insurance and settlement companies already have been applying similar standards to satisfy their responsibility to underwriters. ALTA Best Practices initially requires an organization to prepare a written set of policies and procedures that address each of the seven pillars as outlined by ALTA 1. 2. 3. 4. 5. 6. 7. Licensing Escrow Accounting Procedures Privacy and Information Security Settlement Procedures Title Policy Production and Delivery Professional Liability Insurance Coverage Consumer Complaints F The Title Industry s Response In response the American Land Title Association (ALTA) the title industry s national trade association since 1907 stepped up to help its approximately 5 000 members and the industry as a whole. ALTA s solution was to establish a best practices framework to assist title companies with satisfying their responsibility to clients underwriters and mortgage lenders. 36 C R E D I T U N I O N B U S I N E S S ALTA Best Practices Assessment Procedures Although the CFPB and other government regulators are clear about the obligation of lenders to actively supervise all of their third-party service providers neither the regulations nor issued O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M STRATEGIC PLANNING TAB guidance letters provide details about any standardized method for verifying an organization s compliance with handling the lender s activities. Therefore the burden falls on mortgage lenders to ultimately determine what is deemed acceptable under a self-regulatory umbrella. Since the CFPB has made it clear that mortgage lenders have direct liability for all actions of the third parties they employ it is critical that you seek a superior level of assurance that your service providers are compliant with all laws and regulations imposed on lenders. This assurance of compliance is what lenders have been seeking through their vendor due-diligence processes. Unfortunately this inefficient approach requires lenders to engage their internal staff in evaluating each of the responses requested of title agents. This approach also subjects the title agent to the requirement to individually respond to multiple lender requests under multiple methods for assurance of compliance. As an alternative ALTA has developed another approach designed to provide lenders with what is needed but at the same time lessen the workload for both the lender and the title agent. The ALTA Best Practices program provides title agents with straightforward guidance on what steps they should be employing in their day-to-day operations. But to meet lender requirements an integral part of the program involves a uniform set of standard assessment procedures which are used by a qualified independent third party engaged by the title company to evaluate the settlement servicing provider s actual compliance with Best Practices. The assessment procedures provide detailed testing requirements for determining compliance with each of the seven areas listed previously. While a portion of the assessment can be conducted remotely to properly complete the assessment procedures the third party must perform an onsite visit to physically review a sample of the title professional s files to verify that physical security measures are in place and to conduct appropriate interviews with staff. This onsite verification of compliance with the title professional s written policies and procedures makes millennials A generation marked by increased use of social media and digital technologies. Would this ad matter to the generation that can make or break a brand within a few keystrokes These digital natives are the current prime target for credit unions everywhere and PSCU has the social media tools and insights you need to reach them in a way that s relevant. The leading CUSO for 30 years we know a thing or two about embracing change and having conversations that matter. Let us show you how. 888.918.7357 37 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M STRATEGIC PLANNING this program far superior to the typical lender approach of merely requesting a copy of the policies and procedures. ALTA s guidelines for confirming compliance with Best Practices are broad in certain respects. Although ALTA does not require a certified public accounting (CPA) firm to perform the assessment procedures many mortgage lenders and title agents are turning to CPA firms for assistance with Best Practices. The American Institute of CPAs (AICPA) released Best Practices Technical Questions and Answers that provides non-authoritative guidance to accounting practitioners serving title and settlement agents. The AICPA guidance describes four types of engagements that accounting practitioners may perform examinations reviews agreed-upon procedures and consulting engagements. The following table summarizes the differences among the engagement types insights An instance of capturing the true nature of a thing. 38 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M TAB STRATEGIC PLANNING Benefits of Working with ALTA Best Practices Certified Organizations Credit unions are growing more focused on the risk they assume by conducting business with various title companies. This focus has led to increased scrutiny of title companies especially by those lenders who allow the closing professional to prepare the loan disclosures. By requiring a Best Practices certification a credit union may recognize multiple benefits. Higher level of assurance Certification performed by an independent third party provides a higher level of assurance to the lender compared to a self-assessment performed by the title company. Discovery of gaps With a title company s proof of independent analysis the lender can be assured that any overlooked gaps resulting from an internal self-assessment are discovered and addressed. Less of the lender s time and money spent With a title company s proof of certification there is less cost to the lender in terms of both time and expense that may have been associated with conducting vendor due diligence. Identification of other risks An experienced independent third party can help title companies identify risks in other operational areas that are beyond the scope of the Best Practices Assessment but could impact customer service. By promptly addressing these identified risks a title company may improve its customer service approach thus decreasing consumer complaints. By working with certified title companies credit unions can be more confident of their vendor risk program s evaluation of title agencies and therefore their compliance with CFPB requirements. Matthew Rekers serves as Director of the ALTA Best Practices Group with Pershing Yoakley & Associates (PYA) and is a frequent author and speaker on ALTA Best Practices implementation and certification matters impacting the title industry. He has significant experience with regulatory compliance matters internal control design external and internal auditing as well as financial advisory services for credit unions healthcare organizations and other financial institutions. Pete Pearson is an Audit Principal with Pershing Yoakley & Associates (PYA) and provides business advisory services to title insurance financial institution and healthcare industry clients. He offers feasibility studies assists with civil litigation matters facilitates mergers and acquisitions and develops strategic plans. He also serves as a valuable resource for those preparing for ALTA Best Practices implementation and certification. 39 C R E D I T U N II O N U N O N BB UU SS I I N EE SS SS N S E P T E M B E R O C T O B E R 22 0 1 5 0 1 5 C U B U S I N E S S . C O M BRANCH AUTOMATION BY MEREDITH DEEN T Mobile Appointment Booking Solutions Make CUs More Efficient Tech Savvy echnology is changing the retail experience and consumers expectations in the process. Take Starbucks their Mobile Order & Pay app lets consumers order and cover the cost of their latte via their smartphone so when they stop by it s simply in and out. More hair salons are letting people schedule appointments via their mobile device--accommodating hectic schedules and taking the pain out of booking last-minute haircuts. Merchants too are leveraging Bluetooth technology-driven proximity marketing to offer shoppers on-the-spot discounts and deals tailored to their buying habits. And now McDonald s is experimenting with self-service kiosks that let customers order on their own and pick up their food at the counter. These advancements in retail service are markedly changing consumer expectations across all retail channels including financial institutions. That means credit union members are becoming more tech savvy and demanding hightech services from their FIs--which have some catching-up to do. Consensus among industry analysts is that credit unions trail many industries in using technology to enhance the consumer experience and they may also lag behind the tech skills of their own customers and members. Time To Step Up But more credit unions are stepping up to meet consumers emerging needs. We are seeing FIs blend e-services with bricks-and-mortar. For example universal associates armed with tablets now work side-by-side with members reviewing their financial needs delivering a heightened level of personal service. More credit unions are installing tech bars in their offices where 40 C R E D I T U N I O N B U S I N E S S members access tablets and browse the CU s services on their own guided by easy-to-follow menus. Large interactive video walls also let consumers know what the CU has to offer. And high-tech video tellers which connect members with employees in a centralized call center to perform almost any transaction a staff member could handle in person are becoming more prevalent. The emergence of mobile appointment booking tools is going a long way toward improving the tech-savvy image of financial institutions. These solutions let account holders use their mobile devices and PCs to schedule branch appointments through their FI s website and mobile banking app modernizing how customers engage with branch staff. We see the growing demand for these new tools among our clients as many have been asking for appointment scheduling software. FMSI too has introduced a solution made specifically for credit unions. O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M BRANCH AUTOMATION What s With The App These appointment booking tools typically include a staff-facing appointment calendar as well as the mobile web booking tool. For managers the app provides detailed appointment scheduling data and details into the retail platform. This offers powerful insights to analyze the patterns of account holder appointment requests. The software solutions not only make working with the credit union simpler they typically improve three critical performance areas in the branch--sales service and employee productivity. The tools Understand each individual employee s availability and skill sets making sure to schedule the appointment with the right person at the right time. Eliminate the frustration associated with missed meetings (often caused by lobby abandons due to long waits). Automate the administrative booking process saving staff and account holders valuable time. Optimize staff productivity by ensuring their idle time is filled with account holder facing activity. Send out confirmation and reminder text e-mails. Provide operational insight into staff members and resource planning. Interact with popular calendar applications. Integrate with lobby tracking systems. Learn how appointment software can transform your branch by visiting branchappointments See an informative infographic and watch a demo video of FMSI s new application now. 41 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M BRANCH AUTOMATION Business Intelligence For Branches Every institution has a unique approach when it comes to understanding exactly what is going on in their branch environment. Some utilize elaborate CRM systems while others rely on anecdotal insights from their branch management. One common theme we hear from clients is they would like more information to help them run their branches. Appointment scheduling applications provide detailed business intelligence to help them make more informed staffing and marketing decisions. Scheduling an appointment in advance also allows the CU to better prepare for the meeting including reviewing the person s finances. Members too come to the meeting better prepared FIs have found as the scheduling app lets individuals know what documents to bring. Overall the meeting is more efficient shorter leaving room to discuss additional products that meet members needs--a benefit to branches as they transition from transaction centers to sales hubs. Another benefit is that the solutions appeal to Millennials a market segment CUs covet as their memberships age. Millennials prefer to do most of their banking on their mobile devices and don t often visit the branch. The mobile appointment app can help bridge that gap bringing more Millennials--and more members--back to the branch. And as these appointment scheduling apps become more mainstream among FIs and other businesses expect other generations such as Baby Boomers to recognize their value. These older generations which often prefer to come to the branch first will understand that booking an appointment online presents a number of advantages Avoids long waits in a busy CU. Prevents being placed on hold as the CU finds the right person to meet with. Eliminates showing up at a branch that is not staffed with the employee to meet a specialized need. The Heat Is On The pressure to offer innovative services couldn t be greater than it is today. As credit unions lag a few steps behind their tech-savvy customers and members--whose expectations are being raised by retailers in other industries--appointment setting technology is helping them catch up. But the tools are doing more than closing the gap between what consumers expect from FIs and what CUs deliver the software solutions are increasing branch efficiency creating account holder loyalty and maximizing the branch investment. Meredith Deen is the Chief Operating Officer of FMSI. FMSI provides easy-to-use yet sophisticated business intelligence and performance management systems that facilitate efficient staff scheduling and systematic lobby management of the branch. She can be reached at meredithd For more information visit www. or call (877) 887-3022. 42 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M BRANCH BUSINESS BY DAVID PETERSON Making the Case for Branch Transformation Has the rise in virtual banking left your credit union wondering what to do about too many branches that are too big for the functions they serve It might be time for a shift in your perception of a branch s purpose. These components can help transform your CU branches into vibrant branches of the future. O ver the past 40 years the U.S. population grew approximately 1.5 percent. Over that same period of time the number of financial institution branches increased by 3.4 percent. Why would we need twice as many new retail branches as potential new consumers who would visit them Well to answer that question you need to understand the purpose of a branch. Branches were created To conduct transactions To allow financial products and services to be explained and sold To be marketing beacons to the communities they served Branches were built big both to hold the largely paper-based processing systems and the crowds of people who were required to go to a branch to conduct transactions. People went to the branch because they HAD to. Over the past 10 years advancements in online banking which I will collectively call the virtual branch have allowed people to access their financial institution at a time and place of their choosing with whatever device they have in their hand. The explosion of smartphones and tablets and the general increase in virtual access in nearly every aspect of our lives have dramatically decreased branch visits. This tendency corresponds with a rise in the number of Millennials who are accessing primary financial services and a decrease in the number of Baby Boomer customers. This demographic shift is occurring everywhere but in some areas the shift is more dramatic. This leaves financial institutions in a position where their branches are Too large Too numerous Too empty So is the situation just too bad for credit unions If you have more branches than you need and the ones you have are too big what can you do about that If you try to close branches particularly for a community-based institution the negative PR can be difficult to overcome. Many institutions address the issue of too much square footage by staffing the branch at levels commensurate with the transaction traffic. This approach has the negative effect of making the branches look dead. There are few people inside few members and even fewer employees. Closing branches and understaffing is not the answer. In order for your branches to be strategic assets you have to change your perception of the purpose of a branch. If it is no longer about transactions (and it s not) then what is the purpose I believe there are three primary components to a vibrant branch of the future. They are 1) consultative selling 2) education and 3) problem solving. Let me examine these three elements in more detail. Even if your credit union has a high level of personalized member service it is unlikely you have truly embraced consultative selling. A consultative selling approach is one wherein the prospective member can describe his or her unique situation and desires to an actively listening associate who asks questions to ascertain true needs. This is important because 43 C R E D I T U N II O N U N O N B B U U S S I I NN E E S S S S S EC PT TO EB M B E R 2 0 2 1 0 5 1 5 O E R C U B U S I N E S S . C O M BRANCH BUSINESS TAB most people ask for what they want not necessarily what they need. By asking key questions actively listening and then recommending services tailored to the prospective member s specific needs your associates will change that member s perception relative to what he or she expected from a financial institution. There Is A Dearth Of Financial Literacy In Contemporary Education. Young people no longer learn basic money management in school. If they don t pick up good habits from their parents they enter the world of financial services woefully uneducated about how it all really works. This leads to stories of a 72 Starbucks coffee (after all of the overdraft charges and late fees are assessed) Compound this with the fact that we have more advanced devices and online services than ever before. A new member might walk out with a new share draft account access to online banking and ATMs a debit POS card a credit card mobile apps and so on. Exactly what education or training did we provide him or her on safely and effectively using any of these things Probably none. Yet we have the opportunity to set up and run education classes about our services and how to maximize their safe use. These classes can be set up on a weekly schedule. You don t need a lot of resources to conduct them effectively. A tall table and some stools would work nicely. Then take an associate with some educational skills and command knowledge of all of the internal systems and empower him or her to engage members through education. Don t do this in a conference room or community center. Hold these sessions right in the lobby so everyone entering the branch can see they exist Finally let s examine problem solving. Largely unsung studies show that solving vexing problems raises the probability that a member will recommend a credit union. In an era when there is little loyalty left in financial services we should carefully examine how we can promote activities that endear our members to our institution. Our members have many problems that need solving. Perhaps someone has a general problem with an account. Perhaps since a member upgraded her phone her access to the online application no longer works. Maybe he needs to understand how to integrate his share draft information 44 C R E D I T U N I O N B U S I N E S S into a personal financial manager such as Quicken. Any of these opportunities and many more are excellent for allowing you to provide a valuable and appreciated service. There is nothing stopping you from giving members access to an appointment app on the Web allowing them to make an appointment for a specific time. This ensures you will have an associate with the appropriate level of skill available when the member shows up for the appointment. Consultative selling education and problem solving does the combination of these three elements bring to mind any particular retailer that has embraced them to near perfection If you guessed the Apple store then kudos to you The Apple store is an amazing example of the type of engagement that can absolutely occur in our branches if we but have the will to make it so. Think about these statistics. In 2012 the average annual revenue per square foot of all stores in malls was 341. Tiffany s was number two with annual per-square-foot revenue at 3 017. And who was first Of course Apple with a whopping 6 050 in annual revenue per square foot. You say Well David they are selling consumer electronics. That s mighty different from selling financial services. My point is not whether you approximate Apple s per-square-foot sales. The point is that Apple had a perfectly great model of selling computers and providing service without any retail stores. Did the company need to create stores to sell products Nope. It created stores to create raving fans to have places where existing users and new prospects could come and learn about what products work best to receive education on what they had purchased and to get help for vexing problems. Think about it this way Apple completely disrupted traditional computer retailing. Customers went from looking at products O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M BRANCH BUSINESS TAB to doing learning using products. And salespeople turned into teachers. That is why at 11 o clock in the morning on a typical Wednesday when the rest of the mall is dead the Apple Store is slammed. Could you change the focus of your branches to engagement and get close to the customer satisfaction that Apple has achieved I believe credit unions have the same opportunity to be disruptive in financial services and I think it s imperative you make the effort to do so. I have left out a lot of detail in this article. Many are asking Okay I m interested. Give me more details. Fair enough. Over a series of articles I will continue to drill down into the subject of branch transformation. I ll discuss details about how you can transform the physical structure your employees and perhaps more importantly your members. I will also address the fact that even if you change your typical branch into a strategic engagement center it might still be too big. Well there s a potential solution for that as well. Most importantly I want you to think strategically and innovatively. Most credit union employees would not consider themselves particularly innovative. Yet innovative thinking may be the most important skill we can exhibit in the coming years. You have non-bank competitors that would purport to disrupt your franchise. You must think innovatively about the challenges that lie ahead and make a concerted effort to create meaningful strategies that will ensure your institution is a vital partner for your members well into the future. David Peterson serves as Chief Strategic Officer of i7strategies an independent strategic planning and consulting firm for financial services and electronic payment initiatives. Email address david Website www. 45 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M 45 MEMBER EXPERIENCE BY PATRICIA TRIPAR An Effortless Member Experience Is Critical in the Current Regulatory and Economic Environment If you thought the credit union landscape was already competitive it s about to get worse. Recently approved NCUA regulations are necessitating CUs to develop new ways to increase their member base and enhance revenue. Discover how to grow your membership by heightening customer experience all without breaking the new rules. of many credit unions most are handicapped in their ability to enhance revenue via increased fees. So the time is now for credit unions to increase membership the right way. T he National Credit Union Administration (NCUA) recently approved regulations that will prohibit credit unions from creating organizations such as charities for the purpose of acquiring customers not otherwise eligible for membership. The new rule will go into effect shortly and states that any charity created by a credit union must have a separate and distinct function that is removed from just increasing a credit union s membership. According to one major credit union CEO what s now become habit credit unions creating entities solely for the purpose of qualifying individuals for membership violates the intent of the statute that limits credit unions from serving defined fields of membership. And advertising that anyone can join can and always has been inviting trouble. When it comes to NCUA s new regulations existing members regardless of how they came into the credit union are grandfathered in providing some relief from the Administration s new regulations. Nevertheless credit unions now need to focus on customer acquisition within the context of their membership guidelines and mission not via charities or entities created to enhance membership. Thus the credit union landscape has become ever more competitive as firms need to develop new ways to increase their member base and enhance revenue. Real interest rates are near zero. Net interest yields are razor thin. And because of the mission-based operating model 46 C R E D I T U N I O N B U S I I N EE S S B U S N S S Is Customer Experience Hindering Membership Growth Studies have shown however that it is five times more expensive to acquire a customer than it is to retain one. Thus in this new regulatory environment and especially in light of the current macroeconomic environment retention and cross up-sell of the existing member base will be even more important. Loyal members are happy members who find it easy to do business with a financial institution. One key component of maintaining loyal and active members is an excellent customer experience that includes reduced customer effort (i.e. how easy is it for members to do business). West Monroe Partners 2015 Customer Effort Index in Banks and Credit Unions Study studied the level of effort required to do business with more than 25 national and regional banks and credit unions. In it we examined the effort that it takes to do business across multiple bank and credit union touch-points including the public website the online customer portal online chat the mobile public website the mobile customer portal IVR and via live customer service representatives in the S O P T E M B E R E C T O B E R 22 0 1 5 0 1 5 C U B U S I N E S S . C O M MEMBER EXPERIENCE TAB contact center. Through this research West Monroe identified customer effort leaders and the key practices those banks and credit unions employ to reduce customer effort. As shown in the chart below one thing was clear from the research credit unions many of which are smaller than their bank counterparts in terms of asset size are lagging in terms of customer experience and reducing customer effort. But they don t have to be. As a part of the study West Monroe established a correlation between low customer effort and higher revenue growth. After measuring CEI for the 26 banks and credit unions we examined the revenue growth from these institutions from publicly available financial data. We then ran a statistical regression and correlation analysis of the institutions CEI (assessed during 2014) with revenue growth from 2013 to 2014. The coefficient of correlation (measure of strength and direction of the linear relationship between bank CEI and revenue growth) and R-squared (the coefficient of determination that is how much of the variability of revenue growth is explained by the level of customer effort) after removing outliers are as follows Correlation R-Squared 0.728604586 0.530864643 that level of customer effort as measured by West Monroe s Customer Effort Index correlates highly with revenue growth for banks and credit unions. Four Ways to Improve Customer Effort and Increase Retention In order to address customer satisfaction and ensure service concerns don t reach extreme heights there are a number of improvements that credit unions should consider to amplify their customer experience. With the recent amendments from NCUA that are applicable to membership acquisition tactics now is the time for the credit union industry to regroup and institute changes that could have a major difference on both its bottom line and customer perception. Put your experts closer to the consumer. Adding a live chat and or virtual agent option(s) on your website that let(s) customers have the experience of communicating (or perceiving to communicate) directly with credit union employees is another way to expedite concerns and arm members with the knowledge they need to drive their own banking experiences. Calculate insights for different types of members. Run a customer effort assessment that includes predictive and preemptive analytic techniques to determine 1) how to best sell market and service members 2) what members are most at risk and how to retain them and 3) the best methods to gain more existing members share of wallet. Plan ahead. Create a roadmap that outlines each step necessary 47 2 0 1 5 C U B U S I N E S S . C O M Given that a perfect correlation would be 1.0 (any data set to itself) these correlation coefficients are very strong and statistically significant. As a result they demonstrate empirically C R E D I T U N I O N B U S I N E S S O C T O B E R MEMBER EXPERIENCE TAB to build a stronger experience for you and your members. Outline the low-hanging fruit as well as longer-term initiatives that factor into a customer experience overhaul. Prioritize based upon both strategic and economic impact as well as the ability to implement in house or with a partner. Facilitate self-service. Enhancing customer portals with advanced offerings beyond just checking balances can better guide customers and empower them in their banking needs. By offering customers additional resources including FAQs you ll likely see a drop-off in service calls and contact center volume making it a win-win for both external and internal audiences. Credit unions challenges in recruiting new members and engaging their oldest relationships point to a need for customer experience improvements. With minor adjustments to current channels and a thoughtful plan for the future credit unions can reduce the customer effort easily leading to more loyal lasting customers. Patricia Tripar is a senior manager in West Monroe Partners Banking & Credit Unions practice and is responsible for developing the firm s capabilities in treasury management for financial institutions. She has more than 16 years of business consulting and technology experience in product management new product design and development customer experience change management and program office management. How would your customers rate their experience at your drive up Maximize Teller Productivity with a Currency Dispenser (or Recycler) Contact us at Proven Performance and Quality Phone 800-243-2624 Email dispensers Online 2 0 1 5 C U B U S I N E S S . C O M 48 C R E D I T U N I O N B U S I N E S S O C T O B E R COMPLIANCE TAB UPDATE HERE BY CINDY WILLIAMS C Compliance Officers Get Your Head in The Cloud hoosing the right Cloud provider might sound like the realm of IT but it often falls upon the credit union compliance officer. Either way compliance will be part of the process. What risks should your CU be considering before signing a cloud contract Read on to find out. Credit union leaders from technology to marketing lending to business development hear about The Cloud all the time. Generally the sense is that this technology is the greatest thing since sliced bread. While that may be true compliance officers should be on high alert when their credit union is talking about making the switch. That s because partnering with the wrong cloud provider can greatly change a cooperative s risk environment. Why has Cloud vendor due diligence become the domain of the compliance officer you may ask. Shouldn t this fall to the IT department First many small credit unions don t have an IT department. Second some of the most critical areas to examine such as information security and disposal of member information are most closely aligned with compliance. Third regulators are taking a closer look at financial institutions third-party due diligence policies and procedures. If your credit union prefers IT to take the lead that s perfectly fine. Just be sure compliance is involved in the process both before entering into an agreement and on an ongoing basis. There are at least five risks to consider before signing a Cloud contract. These include Overall health of the provider How the provider shares data Physical and cyber security of the provider Emergency and back-up plans Exit terms of the contract Provider Health Just a few of the indictors you can use to evaluate a vendor s overall health are the length of time it has been in business as well as how long it has provided Cloud services the provider s relationships with other third parties and any recent litigation in which the provider has been involved. Data Segregation & eDiscovery How your provider shares your proprietary data is an incredibly important consideration. Ask after the vendor s practices to understand how your information is segregated from that of its other clients. When considering this risk keep in mind that a Cloud provider can be compelled by law enforcement and or regulators to hand over your data even if doing so goes against its regular business practices. Data Security Get to know more about the controls such as encryption and physical security that are used to ensure data is properly protected. Is the provider required to protect your data to the same level you do internally It s critically important for you to be satisfied that the contract will sufficiently address your credit union s compliance with laws that govern privacy data breach reporting and notification of members following a compromise. Find out how the provider conducts regular backup and recovery tests as well as whether there are limits to the amount of data that can be backed up. A natural question here is how old data is deleted from the system. It s not overreaching to ask detailed questions such as how the provider disposes of its hardware upon replacement. Set expectations about data breaches upfront. Inquire as to whether the provider has experienced any unauthorized access during the last year and what its plans are in terms of notifying you when compromises occur. Don t be discouraged if the provider has suffered a recent breach. Often the experience results in an improved security system policies and procedures vs. an attitude of A breach will never happen here. 49 2 0 1 5 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S O C T O B E R LIMITED TIME OFFER Introductory Rebate COMPLIANCE UPDATE Provider Performance Doesn t require a user to be in a specific location to Become aware of the provider s plans for transferring member use the service data to an alternate supplier if the need arises as well as its Allows credit unions to reduce cost of information anticipated timeframe for data restoration in the event of a management loss. What are the provider s contingency plans during natural Provides for quicker updates of software disasters or system outages Does the contract include provider liability for an interruption of service or loss of data Wheat white high-fiber whole grain low-calorie the options and their respective risks and benefits are enough to make Exit Plan your head spin. At the same time making the right decision Lastly will the provider accept your proposed partnership can greatly improve your diet. Cloud technology is no different. dissolution terms Importantly what will happen to your data The choices are plenty and the right decision can have a hugely upon a parting of ways or if the provider goes out of business positive impact on the credit union s overall health. Take the It s vital to have an agreement in place that adequately covers time to research and be sure to document your due diligence how your data will be returned and within what time period. because regulators will want to see you ve done your homework. To be sure there are great benefits to moving information and access to The Cloud. It may in fact be the greatest thing Cindy Williams is vice president of regulatory compliance for since sliced bread. Of course choosing which of the countless PolicyWorks a national leader of credit union compliance varieties of sliced bread will make up your sandwich isn t easy. solutions. She can be reached at cindyw What s so great about The Cloud Loan Originator training You ve got this. Do you still need to satisfy your training requirements Look no further than the comfort of your own office. A new NMLSapproved self-study course is specifically designed for credit unions and meets the continuing education requirements of Reg Z. Enroll today at MLO Check it off your to-do list Enroll today at MLO OFFERED BY INSTRUCTED BY The services provided by PolicyWorks should not be construed as legal services legal advice or in any way establishing an attorney-client relationship. Making compliance easy for you. 866.518.0209 POLICYWORKSLLC.COM 51 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS BY KARIN BROWN-PURTELL CLE W You Can Collect From a Turnip hat do you say when the debtor says You can t get blood from a turnip This is the phrase that sometimes stumps both inexperienced and experienced collectors. We all know you didn t lend the money to a turnip but the debtor must believe he has been transformed into a vegetable. You in turn you must now figure out how to collect from one. Basically there are two types of turnips Turnip A The will pay vegetable. This turnip will pay but feels he cannot pay at this time and Turnip B The won t pay vegetable. The won t pay turnip never intended to pay you. This debtor most likely is a vegetable. The accuracy of his or her self-reporting is often called into question and he she may be irrational in his conversations. To collect from Turnip A you ll need to overcome his objection and convince him why they should pay you before anyone else. The professional collector wears many hats when speaking with the member communicator salesperson counselor and financial advisor. All calls require the collector to listen intently to everything the debtor is saying and trying to identify the reason for the late payments or the objection to making the payment. Everyone pays someone and the collector must remember they are competing for the same pool of money that all the other creditors are competing for. People are persuaded by people. To overcome his objections you ll need to convenience him that the very reason he believes he can t pay is the very reason he should pay. Try putting a question mark after the payment objection. If the debtor says he Won t pay. Some responses might be... Why don t you believe you are past due What part of the account do you feel you don t owe What is the problem Let s clear up the undisputed portion of this bill If you can show the member that whatever the objection is 52 C R E D I T U N I O N B U S I N E S S actually the reason they should pay you will effectively eliminate the blood from a turnip objection. For example if the debtor is unemployed he would benefit by keeping his payments current with your credit union. At some point during or after his unemployment period he may need to borrow money to help him catch up. If he keeps this loan payment current with your organization you may be in a position to help him in the future. However if you feel the member has some undisclosed reason for not paying be honest and just ask him what it is. Determining the real reason(s) for non-payment aren t always easy and the collector may need to ask WHY up to five times in order to get to the heart of the problem. Collector Why can t you make the payment Debtor I don t have the money. Collector Why don t you have the money Debtor Because I have to bills to pay you re not my only bill. Collector Why were those bills more important that this Debtor Because I had to get the car fixed so I could go to work. Ahhhh now we re getting somewhere. This is the real problem. The car is in need of repairs. Is this your collateral Did we find out where the vehicle was being fixed What was wrong with the car Now we ve established that this loan is important to him. The member has told you he needs his transportation to get to work. This may be a good time to pursue the very reason he thinks he can t pay is the very reason he should pay approach. Focus on why it s important to keep his car payments current. If the member states he ... has no money the collector might say If you had the money you would take care of this 2 0 1 5 C U B U S I N E S S . C O M O C T O B E R LENDING SOLUTIONS right In most cases the answer will be yes. The collector just has to find the best payment solution. But if the member says Get in line. You re not the only creditor I owe money to. The collector might respond with Let me help you find a solution that helps you get this debt and any others resolved at the same time. Delinquency resolution isn t always about what you say but in how you say it. In other situations the debtor might actually believe he s already paid the payment. In these cases the collector should indicate In order to credit your account properly I need to ask you when and where you sent the check and the amount it was for. If the check was sent more than ten days ago the collector should ask for a new check and if available take the payment over the phone. If the replacement check has not been received in a reasonable time frame then escalate collection efforts. Ask the member to Check with their financial institution to see if their check has cleared the account. If the check has cleared their account ask for a fax of the front and back of the check. If the check has not cleared their account ask for a new check again if available take the payment over the phone. During a collection call it s easy to get caught up in the moment and feel the need to be right have the last word and win the argument. It is important that collectors keep their eye on their goal resolving the delinquency. This will not happen if the collector s objective is to win the verbal battle. Find some point of agreement before you start to answer an objection. This is the best known way to cushion your answer and render it unobjectionable. The member will not object as much if he feels you understand his problem. Often difficult calls happen because consumers do not think anyone has heard them and feel a need to shout. To help defuse the situation the collector might say something like... This is what I heard you say.... Can we agree on that Let me summarize what I believe you said... Did I get it right or I think I heard you say.. If we agree to this will you agree to... Empathize. Say something like I understand why you feel that way-others have felt the same way. In fact I have felt the same way myself. But here is what I have found to be the case... then the collectors should state the facts leaving strong emotions out of the conversation. Apologizing. An apology goes a long way even when you didn t do anything wrong. When consumers get upset during a collection call keep in mind they are upset at the situation usually not at the collector. Apologizing helps soothe feelings of frustration and anger. The collector should try phrases such as I am sorry I have upset you. Can we start over Or I am sorry you feel this way. I apologize that is not what the credit union intended How about we look at it this way.... Denying the objection Sometimes members will test the credit union with some pretty outlandish objections. If you try to logically answer illogical objections you will be sucked into a long drawn-out and usually fruitless ordeal. Show the member you have your cards on the table and expect him to do the same. If the objection is obviously untrue you can smile and say Of course I don t believe that. Close the sale Any reply that can postpone your demand for full and immediate payment can be met in several ways. It is amazing how many collectors miss the close because they didn t ask for the money. Don t forget the collector s goal is to prevent members from appearing on the delinquency report. To resolve the delinquency the collector MUST overcome the debtor s objections by discovering solutions which allow the member to make the payment. Here are some response scenarios that may improve the collectability of your credit union s past due accounts 1. The member may not be able to make two payments to meet your minimum payment expectation. A solution may be to accept one and payments over the next four- 53 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS months. You ve now discovered a win-win solution for both the member and the credit union. 2. If the debtor indicates that all he can do is make payment the collector might say Well we can work with that today but you need to get this paid current as quickly as possible. What did you have in mind to bring this account up to date Keep in mind that you can t let the debtor drag this out. The collector must keep their eye on the goal and not let this account hit the delinquency. The collector must direct the conversation to achieve their objective and collect the debt. Once you discover a solution to the objection the collector should simply say Let s go ahead and get this paid . ....And should immediately take a payment over the phone Lending Solutions Consulting Inc. is the premier consulting group in the country. Karin Brown-Purtell the most experienced and educated consultant in the industry specializes in teaching credit union collectors resolution strategies. If your credit union is making no head way with your delinquency numbers ask yourself if your collectors work in a dial for dollars atmosphere. We promise you this method although very common is unproductive and will yield marginal at best results. The article above provides a small snapshot of the training Karin provides on-site for collectors. She is also phenomenal at helping credit unions with maximizing collection productivity by analyzing collection ques and workflows. Please contact Scot Vackar at svackar or 224-286-6070 to stop running in one place and gain some distance. University of Lending May 11 - 15 Crystal Lake IL August 10 - 14 Crystal Lake IL 4th Quarter 2015 Las Vegas NV C M Y CM MY CY CMY K Management Institute for CEOs and Managers September 15 - 17 Phoenix AZ Collections Institute April 7 - 9 Chicago IL October 6 - 8 Phoenix AZ Indirect Institute May 4 - 6 San Antonio TX 54 C R E D I T U N I O N B U S I N E S S O C T O B E R 2 0 1 5 C U B U S I N E S S . C O M service The occupation or function of helping. What limits should a function like this have A good CUSO not only knows the answer to this question but also builds their availability upon it. At PSCU our 24 7 365 Total Member Care Team embodies your credit union to assist your members all hours of the day and night. We have the tools and technology to address concerns quickly and we spring to action when you wish to unwind. As for limits that s not our business. tmc 888.918.7357