PUB 19 ISSUE 4 NEW MEXICO PUBLISHED BY NEW MEXICO BANKERS ASSOCIATION, FOUNDED IN 1906 PHOTO BY: JIM RENFROW Presidents’ Message — David Hockmuth Page 6 Beating Back a Bad Idea: How Bankers United to Play Defense Against Durbin Expansion — Rob Nichols Page 16 Southwest Airlines’ Holiday Meltdown: A Deeper Look — Mark Anderson Page 18
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O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S The mission of the New Mexico Bankers Association (NMBA) is to serve member bank needs by acting as New Mexico banking’s representative to government, the public, and the industry; providing resources, education and information to enhance the opportunities for success in banking; promoting unity within the industry on common issues; and seeking to improve the regulatory climate to the end that banks can profitably compete in the providing of financial and related products and services. ©2023 The NewMexico Bankers Association (NMBA) | The newsLINK Group, LLC. All rights reserved. The NewMexico Bankers Digest is published four times each year by The newsLINK Group, LLC for NMBA and is the official publication for this association. The information contained in this publication is intended to provide general information for review, consideration and education. The contents do not constitute legal advice and should not be relied on as such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of the NMBA, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. The NewMexico Bankers Digest is a collective work, and as such, some articles are submitted by authors who are independent of NMBA. While the New Mexico Bankers Digest encourages a first-print policy, in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at 855.747.4003. 6 PRESIDENT’S MESSAGE: LE TOUR DE NEW MEXICO By David Hockmuth, President, New Mexico Bankers Association 8 EXECUTIVE VICE PRESIDENT’S MESSAGE: 2023 LEGISLATURE—AN OVERVIEW By John W. Anderson, Executive Vice President, New Mexico Bankers Association 12 SIX STRATEGIES TO NAVIGATE CREDIT STRESS By Jay Kenney, SVP, Southwest Regional Manager, PCBB 14 BANKS NEED A GAME PLAN FOR TODAY’S INTEREST RATE ENVIRONMENT By Rob Blackwell, Chief Content Officer, Intrafi 16 WASHINGTON UPDATE: BEATING BACK A BAD IDEA How Bankers United to Play Defense Against Durbin Expansion By Rob Nichols, President and CEO, American Bankers Association 17 CFPB TO FURNISHERS: KNOW YOUR ROLE! By Prince Girn, Compliance Alliance 18 SOUTHWEST AIRLINES’ HOLIDAY MELTDOWN: A DEEPER LOOK By Mark Anderson, NMBA Legal and Legislative Assistant 22 BANK NEWS 22 IN MEMORIAM: GARY DON FORREST Our Mission Contents President David Hockmuth Wells Fargo Bank, NA 200 Lomas, NW Albuquerque, NM 87102 President-Elect Mark Horn Pinnacle Bank 107 E. Aztec Ave. Gallup, NM 87301 Secretary Treasurer Michael Lowrimore Bank of the West 303 Roma Ave., NW Albuquerque, NM 87102 Immediate Past President Jason Wyatt Western Commerce Bank 212 North Canal St. Carlsbad, NM 88220 TERMS EXPIRING 2023 Ken Clayton Western Bank, Artesia 320 W. Texas Artesia, NM 88210 Sheila Mathews Four Corners Community Bank 500 W. Main, Suite 101 Farmington, NM 87401 Jay Jenkins CNB Bank PO Box 1359 Carlsbad, NM 88220 TERMS EXPIRING 2024 Kyle Beasley Bank of Albuquerque 100 Sun Ave., NE, Suite 500 Albuquerque, NM 87109 Paul Mondragon Bank of America, NA 4401 Central Ave., NE Albuquerque, NM 87108 Elizabeth Earls U.S. Bank, NA 7900 Jefferson, NE Albuquerque, NM 87109 TERMS EXPIRING 2025 Scott Czarniak First National 1870 7300 Jefferson St., NE Albuquerque, NM 87109 Aaron Emmert Pioneer Bank 3000 N. Main St. Roswell, NM 88201 Kamal Ali PNC Bank 2494 Louisiana Blvd., NE Albuquerque, NM 87110 2023 NMBA Board of Directors 4
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PRESIDENT’S MESSAGE TITLE TITLE VISIT OUR WEBSITE AT: NMBANKERS.COM DAVID HOCKMUTH President New Mexico Bankers Association We wanted to personally thank legislators for their service to the state and bankers for their continued support of the NMBA. Before I was sworn in as NMBA President, a number of past presidents told me that one of the highlights of my year would be the President’s annual statewide “road trip” to meet with bankers and legislators in their hometowns. My predecessors were right and the purpose of the meetings was quite simple. We wanted to personally thank legislators for their service to the state and bankers for their continued support for the NMBA. I have decided to treat this edition of the President’s Message as a bit of a travelogue. In November and December, John Anderson and I spent multiple weeks traveling to Carlsbad, Roswell, Clovis, Farmington, Santa Fe, Albuquerque, and Las Cruces. During each meeting, we learned of local needs and the economic situations of particular regions within the state. In Carlsbad, we found a community that was booming: traffic jams, new hotels and restaurants, man-camps, jammed parking lots, and "Help Wanted" signs in many retail windows. Of course, prosperity brings a real strain on infrastructure, schools, and roads. Hopefully, the legislature will provide capital outlay for additional funding in 2023 to meet these needs. Then, we were off to Roswell! We had an outstanding turnout of bankers and legislators at our stop. We had a lively debate concerning the local economy, the importance of oil and gas to our state, the general election results, and the NMBA legislative agenda – with particular emphasis on the state bank. Finally, we were treated to an evening with the recently elected Mayor of Roswell, Tim Jennings. Tim served 35 years in the New Mexico Senate and has been a board member of Pioneer Banks for 41 years. He will assist John Anderson during the 2023 session as a part-time NMBA lobbyist. Next stop: Clovis. We had a wonderful meeting with Senator Stuart Ingle, LE TOUR DE NEW MEXICO 6
Representative Jack Chatfield, and a host of bankers. Both legislators were concerned with how best to spend the $3.5 billion of new money. Saving at least half would be best. When I asked what would be best for the state, the Senator quipped that many legislators are against any deal they do not participate in. I then asked one of our bankers what he recommended for lunch, he humorously responded, “Anything with gravy or ranch dressing.” Next, we traveled to another terrific community, Farmington. We had a big turnout of bankers and legislators (five of the six invitees). For our legislative dinner event, there was a spirited discussion concerning the importance of the oil and gas industry to our state, the state-wide health care crisis, crime, and how to best spend the $3.5 billion windfall for the 2023 Legislature. I want to personally thank Sheila Mathews, CEO and President of Four Corners Community Bank and an NMBA Board Member, for making our evening event a great success. She is truly remarkable. Moving ahead, John and I made our way to Santa Fe. Representative Christine Chandler (D-Los Alamos), Chair of the House Taxation and Revenue Committee, and Senator Peter Wirth, Senate Majority Leader, briefed the bankers on matters likely to be included in the omnibus tax bill for 2023. All taxes – including gross receipts, personal income, corporate, property, and excise – may be addressed. I want to thank Century Bank CEO and President Max Myers for providing such delicious food during our stop in Santa Fe. It was a major component of making our visit to the state’s capital a huge success. Our next lunch in Albuquerque was another success. We hosted several legislators, including two of our newly elected state Representatives. Not surprisingly, the topic that consumed much of the discussion was crime, followed by health care and the homeless crisis. Our final lunch was held in Las Cruces at the Double Eagle Restaurant in Old Mesilla. Take it from me: the Double Eagle has to be one of the most beautiful properties in the state of New Mexico. We had as our special guest Bryan Ashenbaum, the newly appointed Dean of the New Mexico State University College of Business. It will be interesting to follow Bryan’s career at NMSU. He clearly has the energy and intellect to do an excellent job. We had the opportunity to discuss the plans for an NMSU/ NMBA internship program, which we hope to get underway in 2023. What are my takeaways from this trip? First of all, we have a beautiful state. Secondly, our potential is unlimited with abundant natural resources, two national laboratories, several military installations, a flourishing film industry, a thriving banking industry, and 112 dedicated New Mexico state legislators. Finally, the 2023 Legislature got underway on January 17 for 60 days. We will inform you of current legislative events as the session progresses. I wish you all a happy and prosperous new year! David Hockmouth Issue 4 • 2022 7
2023 LEGISLATURE AN OVERVIEW JOHN W. ANDERSON Executive Vice President New Mexico Bankers Association The recommendations in the Think New Mexico report respond to the Yazzi ruling and directly benefit New Mexico's students. EXECUTIVE VICE PRESIDENT’S MESSAGE VISIT OUR WEBSITE AT: NMBANKERS.COM 8
Thank goodness the midterm elections have finally concluded. No more mudslinging for at least the next two years. As you may know, all state Legislative House seats were up for grabs in 2022. After all was said and done, the Republicans and Democrats each picked up two seats, leaving the House exactly as it was prior to the 2022 election cycle, with 45 Democrats and 25 Republicans. Also, there are currently 27 Democrats and 15 Republicans in the Senate. The 2023 Legislature opened on Tuesday, January 17, for 60 days, ending on Saturday, March 18, at noon. Some of the legislation of particular interest to the NMBA that we expect to be introduced includes: • Creation of a state bank • Paid family and medical leave • Repeal the state’s prohibition on rent control which would allow municipalities and counties to consider the issue • Major state tax reform, including gross receipts, corporate income tax and personal income taxes • Additional funding for the state Financial Institutions Division • Increasing and updating bankruptcy and debt collection exemptions, including the homestead exemption • Trust legislation to clarify conservator’s liability • Mandatory course in financial literacy as a requirement for high school graduation • Financial exploitation of elderly, disabled or vulnerable adults • State budget (It is estimated that the 2023 Legislature will have $3.5 billion in new money to appropriate for the fiscal year beginning July 1, 2023.) We anticipate there will be more than 2,000 bills introduced during the 2023 Legislature, as there is no limit on legislative introductions during a 60-day session. Education Reform In meetings with business leaders, we are constantly reminded that New Mexico needs to drastically improve our public education system. Our education system often renders our workforce less than competitive. That said, I have to praise the Santa Fe think tank, Think New Mexico, for its most recent report. It provides a 10 point plan and various legislative recommendations to improve the performance of the state’s struggling public education system, which has been ranked last in the United States in valuations by Education Week, U.S. News and World Report, Forbes, Kids Count and Wallethub. Historically, Mississippi held the lowest ranking among states in poverty, child welfare and education. However, in the past 10 years, Mississippi has jumped ahead of many states on national reading and math testing, improving from 49th in the U.S. for fourth-grade reading in 2013 to 29th in 2019. And in fourth-grade math, students improved from 50th to 23rd. In New Mexico, this year’s statewide assessments found only 34% of third through eighth graders proficient in reading and only 25% in math. The state became acutely aware of the deficiencies in our public education system when, in 2018, a judge in the First Judicial Court (Santa Fe) issued a decision and order in the Yazzi/Martinez v. New Mexico case that the vast majority of at-risk children finish each school year without the basic literacy and math skills needed to pursue post-secondary education or a career. The funding provided by the state legislature was ruled insufficient based on the State Constitution. The court noted that the Public Education Department failed its audit and its supervisory role to ensure school districts are adequately spending the funds that are provided to them to effectively provide students with proper education. The court ordered the state to ensure opportunities for students to be college and career-ready, as well as remedy deep inequities for low-income Native American, Englishlanguage learners, and students with disabilities. The court ordered the state to develop a court-approved plan for quality education for at-risk students and called for extended learning for all students enrolled in high-priority schools. The recommendations in the Think New Mexico report respond to the Yazzi ruling and directly benefit New Mexico’s students. It should be pointed out that, in all fairness, the state has already begun to take positive steps, such as substantially raising teachers’ salaries to the highest among our surrounding states and increasing access to early childhood education. Issue 4 • 2022 9
The Think New Mexico report stresses the importance of: • Optimizing Time for Teaching and Learning. It recommends increasing minimum instruction time for students and adopting a balanced calendar to shorten summer vacation. Shockingly, the State Legislative Finance Committee estimated that students lose approximately 32% of instructional time each year to non-instructional activities such as parent-teacher conferences, home visits, early release, and teacher professional development. • Improving Teacher Training. The research is clear that the single most important factor in a student’s success is the effectiveness of the student’s teacher. As noted in the report: “If American teachers – unlike athletes or manufacturing workers – haven’t got much better over the past three decades, it’s largely because their training hasn’t, either. … [T]eacher training in most of the United States has usually been an afterthought. Most new teachers enter the classroom with a limited set of pedagogical skills, since they get little experience beforehand, and most education courses don’t say much about how you run a class. Then teachers get little ongoing, sustained training to help them improve.” • Revamping the Colleges of Education. Why are potential teachers pursuing alternative rather than traditional pathways into education careers? One reason is that the curriculum at the state’s colleges of education too often emphasizes abstract theory over the practical, skillsbased learning that is most valuable to future teachers. There are eight colleges of education in the state. The curricula at the different colleges are not aligned, and they have not generally evolved to keep up with new research about best practices. • Enhancing Principal Pay and Training. After teacher quality, principal quality is the second most impactful factor in student success, and the two are closely connected: principals are the key to recruiting and keeping excellent teachers. The state’s high teacher attrition is likely linked to our high rate of principal attrition. A 2018 report identified New Mexico as one of the 10 worst states for principal retention, with principals staying an average of well under four years in a position. The cost of replacing a principal is estimated at $75,000. As to why principals leave their jobs, the top reasons were inadequate preparation, insufficient professional development, and low salaries. • Upgrading the Quality of School Boards. New Mexico should increase the annual training requirements for all school board members from five hours to 24 hours and focus on how school board governance can improve student outcomes. • Smaller School Districts, Schools, and Class Sizes. New Mexico should revise the public school capital outlay funding formula to incentivize school districts to build smaller schools: 900 or fewer students for high schools and 400 or fewer for elementary and middle schools. Smaller schools tend to have higher graduation rates, higher student achievement, and a higher level of satisfaction among students and parents. Smaller schools also tend to be safer. • Maximizing the Benefits of Charter Schools. There are 98 charter schools in New Mexico, with an enrollment of 29,219 students. The report encourages the Legislature and Governor to provide greater oversight of failing charter schools and enhance the mission of academically successful charter schools. • Providing a Relevant, Rigorous High School Curriculum. New Mexico must make the student curriculum more relevant. The state should make the high school curriculum more engaging by adding a semester course in finance (financial literacy) to the graduation requirement. We should also maintain a course in government and require a course in civics. The state should require two credits of foreign language for high school graduation. • Depoliticizing Student Assessments. School testing has become a hot-button political issue over the years. In some cases, student test results can be used to reward or punish teachers. The Think New Mexico report noted: “Achievement tests were not designed for the purposes of promoting or grading students, evaluating teachers, or evaluating schools. In fact, connecting these social functions to achievement test data corrupts what the tests are measuring. When a score has been connected to a teacher’s pay or job status, educators will inevitably be drawn toward teaching to the test, and schools toward hiring to the test and paying to the test, rather than making sure students get the well-rounded education they deserve.” I would personally encourage you to purchase a copy of this report. It is an important document providing a roadmap to rethinking public education in New Mexico. You can reach out to Think New Mexico at their address, 1227 Paseo de Peralta, Santa Fe, NM, 87501 or by telephone at 505-992-1315. n It should be pointed out that, in all fairness, the state has already begun to take positive steps, such as substantially raising teachers’ salaries to the highest among our surrounding states and increasing access to early childhood education. 10
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By Jay Kenney, SVP, Southwest Regional Manager, PCBB Between the pandemic and rising inflation and interest rates, the last two years have taken community banks on a wild ride. Rising inflation and the higher interest rates designed to bring inflation back to earth have influenced cash flow and the cost of goods, which can create financial stress for borrowers. Financial stress can then lead to credit stress, a problem for both community banks and their customers. Multiple Challenges in Credit Risk The problem isn’t just that economic circumstances may push some borrowers towards payment tardiness or default. Community banks are seeing: • Varying credit quality by market sectors and subsectors. Some business areas have been hit hard by the pandemic, rising inflation, and/or higher interest rates. Other sectors, like those deemed essential businesses, have remained remarkably unscathed. • Difficulty discerning the creditworthiness of different potential borrowers in those sectors and subsectors. For instance, businesses in travel and tourism found pandemic-related lockdowns in 2020 and 2021 very challenging. Some of those businesses have rebounded since then, such as cruise ship traveling, which saw share prices jump after pandemic safety protocols were removed this past summer. Other travelrelated industries haven’t been as lucky, such as the hotel sector, with lingering staff shortages that caused some hotels to close or leave a portion of rooms unsold. SIX STRATEGIES TO NAVIGATE CREDIT STRESS 12
The challenge, then, is to determine which individual businesses are good credit risks. A firm’s business sector matters, but it isn’t necessarily the last word on whether a bank should lend to it. How can your bank assess risk in ways that encourage safe growth during a volatile economic time? Here are Six Strategies to Help: 1. Notice the industry concentrations already in your loan portfolio. Use real-world observation and what-if analysis to determine the effects of rising interest rates on the sectors and subsectors where your bank is invested. Don’t forget the importance of factors such as region and business size. Commercial real estate companies in New York, for instance, might be experiencing different conditions than commercial real estate companies in Chicago, while still having long-term tenant contracts in common. 2. Collect current financial information from borrowers more frequently – at least every six months. Annual updates are no longer sufficient. Consider all your possible information sources, including credit scores, payment history, debt-to-income ratio, net cash flow variables derived from customer-level income, utilities, rental payments, and other debt servicing. Some financial institutions are even moving toward using real-time data to get the clearest, most up-to-date picture of a customer’s financial standing. 3. Analyze sectors and subsectors of industries to anticipate economic patterns. For instance, the pandemic affected agricultural borrowers differently. Even though both groups are in the same agriculture sector, farmers who sold to grocery stores did well, while farmers who sold to restaurants often had significant financial problems. By the same token, some businesses might find it easier than others to pass along some of their costs – a key ability to thriving when inflation trends higher. You might find that an entire sector has this ability, or you might see that within a single sector, some businesses can pass along costs, and others can’t. Advising the customers who aren’t seeing as much profit of some strategies they can leverage to increase margins will help both them and your community bank. 4. Proactively monitor your higher-risk portfolio concentrations and downgrade at-risk loans, when appropriate. The earlier you see credit risk, the more you can limit nonperformance and help commercial customers restore their credit quality. 5. Stress test your portfolio. Community banks are anticipating potential deterioration in borrowers’ debtservicing capacity, collateral values, and credit quality of their loan portfolios due to exposure to interest-rate risk and inflation risk. There will be more scrutiny from regulators around credit stress, especially those institutions exceeding regulatory guidance on commercial real estate and construction concentration. 6. Think about Current Expected Credit Losses (CECL). Consider what your loan portfolio’s credit risk profile will mean to CECL compliance, which becomes mandatory for most banks next year. Taking a holistic approach toward your borrowers’ circumstances and patterns of financial behavior affords you the ability to see potential problems, such as credit stress, before they occur. Assessing these potential risks will help you make more informed decisions for the health of your portfolio, as well as weather the current economic times. n Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management, international services, lending solutions, and risk management advisory services. To continue this discussion, or for more information, please contact Jay Kenney at www.pcbb.com or jkenney@pcbb.com. Taking a holistic approach toward your borrowers’ circumstances and patterns of financial behavior affords you the ability to see potential problems, such as credit stress, before they occur. Issue 4 • 2022 13
As the Federal Reserve aggressively hikes interest rates to tamp down inflation, depositors are starting to demand more for their money. Results from IntraFi’s most recent quarterly survey of bank executives indicate the trend is likely to continue. Ninety-five percent of respondents expect funding costs to go up, and 71% said deposit competition will increase. But this doesn’t mean banks have to let macroeconomic forces or competitors dictate their strategies. Matt Pieniazek, president and CEO of Darling Consulting Group, recently joined me on Banking with Interest to discuss how banks should think about their balance sheets in the current interest rate environment. He explains why all institutions need clearly documented game plans, how to extricate rate from the value proposition, why rising rates are a good thing, and much more. What follows is our conversation, edited for length and clarity: What are you seeing right now vis-a-vis banks and bank balance sheets? The delta between market rates and what banks pay has never gotten this wide this fast. Even if depositors aren’t looking to move their money, it's hard for them to ignore what's happening. Additionally, during the pandemic, we made it easier to do things electronically and conditioned customers to avoid branches. Today, banking practices are very different than they were three or four years ago. So the dynamics are about to get really interesting, notwithstanding the excess liquidity still out there. What’s your advice to banks? Have a clearly documented game plan. (Many banks don’t.) Start by figuring out how much money you can, or are willing to, let leave; then determine which deposits are most valuable and prioritize those. Next, divide your deposit base into manageable pieces. Start by rank-ordering your largest-balance relationships (this will help with one-off conversations). Second, review your mass-market, traditional banking relationships. Third, review the “tweeners,” or those that aren’t quite whales but larger discretionary balances BANKS NEED A GAME PLAN FOR TODAY’S INTEREST RATE ENVIRONMENT By Rob Blackwell, Chief Content Officer, IntraFi 14
that could be at risk (mid-tier balances comingled with operating balances in those traditional accounts). Get your people in a room to assess the elasticity of deposits in each sector and your value proposition for those different consumer types, specifically, whether it’s driven by rate or other factors. Figure out your pricing strategy for each and how much outflow you’re willing to accept in each area and why. How is social media adding to deposit pressures? It’s definitely having an effect, but banks need to remember that there's always somebody paying more than them. If rate were the most important variable, every other bank would go out of business, and you'd have one big bank paying the highest rates. The point I’m making is that if banks fuel conversations about rate to where it becomes the main topic of discussion, they’re communicating that their value proposition is mainly tied to rate instead of the other things they bring to the table. Conversely, depository institutions that believe in their value propositions will do well during this cycle because they’ll know where they can be proactive. They’ll experiment more, try more things. What are your thoughts on strategies for banks that aren’t dealing with excess liquidity? I’ll start by saying there are many banks with concentrations of large balances that don’t want pricing on these to upset the apple cart. They don't want a handful of accounts messing up their core deposit strategies, so they've been paying higher rates than usual. Then, they've been going and selling the money into a deposit network, such as IntraFi’s, through its One-Way Sell program. This enables them to effectively lower their deposit costs and keep the money out of their deposit expenses by moving it off the balance sheet, knowing they can bring it back on if necessary. Coming back to your question, banks borrowing money are actually pushing local market pricing up. They don't match wholesale, but they’ve got a long runway, given the delta between market rates and what other banks are paying. They’ll pay a lot more than other institutions, but they’ll also save a lot. Right now, borrowing banks are facing high opportunity costs, so if they're dealing with a larger account, they're more apt to pay up or negotiate. Otherwise, they’ll just have to replace them with something substantially more expensive. We've seen a lot of disruption in the past two years from COVID and other factors. How should banks be thinking about ALCOs right now? Way too many ALCOs tend to be more of a reporting function that spends too much time creating detailed decks that do little more than give people headaches. Then, toward the end of meetings, they’ll shoehorn in conversations on what to do. Those institutions have it backward. ALCO should feed strategy. It should be a profit center, not the cost center it tends to be. What are the biggest mistakes banks are making today? One is that they’re not changing loan pricing to levels that represent fair, risk-adjusted returns. They’re letting the liquidity overhang get in the way. The majority of banks – not all – are knowingly doing deals at perhaps the tightest spreads ever. But their business models don’t support FHLB plus 150 to 200. They don’t support SOFR plus 150 to 175. They don’t support prime minus 100 or more. Banks have to get away from all that. They can’t let irrational and desperatecompetition dictate their ongoing lending strategies. They need to improve their balancing act. Another is that many banks don’t socialize the logic underpinning their value propositions. They don’t explain how to deflect objections to those who work on the front lines. They don’t institute formal feedback loops, either. Banks should never underestimate the importance of communication, coaching, and guidance. n . . . during the pandemic, we made it easier to do things electronically and conditioned customers to avoid branches. Today, banking practices are very different than they were three or four years ago. Issue 4 • 2022 15
ROB NICHOLS President and CEO American Bankers Association WASHINGTON UPDATE There’s a saying that “everything old is new again,” and that’s certainly an adage you can bank on in Washington, D.C. – especially when it comes to poor public policy proposals. A textbook example of this unfolded during the 117th Congress, when our industry found itself once again facing a bad idea that we thought had been soundly defeated: placing restrictive routing mandates on credit cards, like those imposed on debit cards by the Durbin Amendment over a decade ago. The idea came in the form of a bipartisan bill – the so-called Credit Card Competition Act – introduced in the Senate by Sens. Dick Durbin (D-Ill) and Roger Marshall (R-Kan.) and in the House by Reps. Peter Welch (D-Vt.) and Lance Gooden (R-Texas). Bankers know all too well that the 2010 Durbin Amendment had disastrous consequences for banks and their customers: it increased the costs of checking accounts and debit cards and ultimately led to the elimination of popular debit card rewards programs. The Durbin Amendment’s most damaging provisions apply to banks of all sizes, causing a nearly 25% cut in the per-transaction debit card revenue earned by banks with under $10 billion in assets. At the same time, it helped line the pockets of large retailers who talked a big game about passing savings on to consumers – but 10 years’ worth of data tells us that simply isn’t what happened. In fact, the Federal Reserve published a study finding that only 1% of merchants lowered prices for consumers since the Durbin price controls took effect. What’s more, the Credit Card Competition Act also goes several steps further than the Durbin amendment – not only would it require banks to add a second network to their customers’ cards, but it would limit them to options set by the Fed, unlike the Durbin Amendment, which allowed banks to choose between any two unaffiliated networks. The Credit Card Competition Act also requires banks to accept virtually any kind of transaction – functionally requiring them to onboard potentially many more than two networks, even networks that don’t meet basic data security standards. Given the potentially catastrophic effect the bill could have on community banks and bank customers – while providing no tangible cost savings or benefits for consumers – the industry sprang into action to set the record straight. Immediately following the bill’s introduction, ABA led a coalition of eight national financial services trade groups in issuing a statement of strong opposition to the bill. We followed this up with numerous letters, op-eds, grassroots calls to action and co-branded ads with the Texas and Kansas bankers BEATING BACK A BAD IDEA HOW BANKERS UNITED TO PLAY DEFENSE AGAINST DURBIN EXPANSION associations that ran in their respective districts. The efforts were amplified by an op-ed from the Florida Bankers Association and a creative “Don’t Let Congress Steal Your Credit Card Rewards!” social media campaign from the Missouri Bankers Association. In early December, we then expanded that effort into an all-out media blitz to stave off any last-minute efforts to attach the bill to a must-pass piece of year-end legislation. Every step of the way, our efforts at the national level were complemented by robust advocacy efforts by our partners at the state bankers’ associations, who stepped up to make calls, attend Washington fly-ins, pen letters and columns, and even appear on national TV to address our concerns about the bill. Together, we blanketed Capitol Hill with a succinct, united message: the Credit Card Competition Act is terrible public policy that should not be enacted. Our combined efforts proved the hollowness of this bill – it failed to attract a single cosponsor beyond the initial two in both the House and Senate or gain enough support to advance as a standalone measure and was successfully blocked from any other bills moving through Congress as the lame-duck session came to a close. This win underscores the tremendous value of our state association alliance and demonstrates the power that our industry can have when we unite behind one message. It’s also an important reminder about vigilance. We can’t say for certain whether and how these bad ideas will rear their heads again in Congresses to come. But what we can say is that if they do, our industry will be ready to respond. n Email Rob at nichols@aba.com. 16
“CFPB seeks to do away with the potential loophole that furnishers may try to take advantage of to evade their obligation to investigate disputes and merely write them off as frivolous at their own discretion.” On September 13, the Consumer Financial Protection Bureau (CFPB) filed an amicus brief in regard to a district court case that was decided between a consumer plaintiff and a credit reporting agency defendant. For those with a limited legal background, an amicus brief is simply a brief submitted to a court by a person or organization who is not a party to a case but has an interest in the action that is essentially trying to convince or have the court consider deciding a matter a particular way in order preserve their interest. Back to the case, in a nutshell, the case was about a consumer who discovered an error on their credit report, which stated that the consumer had a delinquent account with a service provider. The consumer claims that the account was never theirs and was fraudulently opened, so the consumer filed a dispute with the service provider. In response to the dispute, the service provider requested additional documentation, including an affidavit and a police report, which the consumer never provided before or after the request by the service provider. As a result of the consumer’s failure to respond to the service provider’s request, the service provider concluded that the account was not fraudulently opened and then referred the delinquent account to a collection agency. The consumer then filed their first dispute with the consumer reporting company, which the consumer reporting company passed down to the collection agency. Because the account was never noted to be in dispute, the collection agency took no action on the account and did not note the account in dispute even after it was handed the dispute. The consumer then filed a second dispute with the consumer reporting company, which was, again, handed down to the collection agency. This time, however, the consumer stated that the account was subject to litigation and obtained a police report. As a result, the collection agency removed the delinquent account from the credit report and ceased collections. In the litigated matter, the court held for the defendant by stating that furnishers are only obligated to investigate bona fide disputes. The CFPB recognizes that errors on a credit report can have life-altering consequences as those errors can cause an individual to get denied for loans, housing and even employment. Due to the significant impacts an error on a credit report can have, the CFPB realizes the need for consumers to have meaningful procedures in place for companies to investigate and resolve these errors. Indirect and Direct Disputes The Fair Credit Reporting Act (FCRA) gives consumers multiple avenues to dispute errors on their credit report. Since consumers receive their credit information from consumer reporting companies, they often initiate their dispute with the consumer reporting company. This is typically passed down to the furnisher, who is usually the business that reported the information to the reporting company in the first place. This is called an indirect dispute. Consumers also have the option to file their dispute directly with the furnisher, which is called a direct dispute. Any time a furnisher gets handed down a dispute, it is required to investigate the dispute and report its findings of the investigation back to the consumer reporting company. However, disputes get lost in this process because furnishers have adopted the notion that they are free to dismiss these disputes based on whether they believe they are legitimate or not. Due to this discretion, one can probably see why consumers would feel powerless and hopeless when trying to resolve errors on their credit reports. n CFPB TO FURNISHERS: KNOW YOUR ROLE! By Prince Girn, Compliance Alliance Issue 4 • 2022 17
SOUTHWEST AIRLINES’ HOLIDAY MELTDOWN A DEEPER LOOK The holiday season is a time when many people enjoy tuning out the news, relaxing with friends and family, and forgetting their worries. However, in 2022, one of the staples of the holidays, plane travel, turned into a news story that proved impossible to ignore. Southwest Airlines, often ranked as the top American economy and budget airline, suffered a complete meltdown that, in a system with even a little accountability for corporate actors, would have the company looking at serious consequences. It is worth looking into what led to Southwest’s cascading problems and how truly dangerous short-sighted economic and business practices can ultimately be. To summarize what unfolded, Southwest’s recent difficulties hit a crescendo around Christmas, forcing the airline to cancel approximately 15,000 flights around the holidays, including almost 70% of the flights scheduled for the two days following Christmas. The cancellations left waves of travelers stranded in airports, scrambling for accommodations, and even stranded many Southwest crew members. Southwest is a microcosm of America’s airline industry, a small group of corporations that are allowed to act with total impunity. Airline companies’ service and customer satisfaction only get worse; they only make the experience more unpleasant each year, yet their bottom lines keep getting larger and larger. As it does in so many areas, our government has created conditions where these airlines feel like no deed, no matter how egregious, will ever be punished. Southwest’s own employees have also called out the company's business practices, most notably in a letter from the Southwest Airlines Pilot Association dated January 3. Captain Tom Nekouei, vice president of the Association, claims that former CEO and chairman Gary Kelly has spearheaded constant underinvestment in the company’s infrastructure, leading to repeated meltdowns over the past 15 years. This underinvestment has led to short staffing, By Mark Anderson, NMBA Legal and Legislative Assistant 18
outdated technology, and an inefficient plane-routing system. Nekouei lays out a familiar scenario in the letter: a refusal on behalf of the executives at the top to invest capital in a company's infrastructure in order to juice short-term profits, leading to consequences down the line. In the letter, Nekouei states that the Pilot Association “has been beating this drum to management for nearly a decade pleading with them to spend the necessary capital to prevent the ultimate consequence someday. As CEO, Gary Kelly made a conscious decision to make the less-than-necessary investments in tech upgrades in favor of maximizing shareholder return because, well, 'our tech’s been working OK for 20 years.'” It’s frightening that an industry like air travel, which is so dependent on the precision of the crew and equipment, is now comfortably in the domain of corporate cost-cutting. If executives are willing to cut corners on staffing and technology, then it is only a matter of time before corners are cut on the planes themselves. This is the kind of erosion in integrity and trust that greed can ultimately lead to. If powerful actors aren’t truly held to account, then what is to prevent them from trying to get away with a little bit more? If the airline executives aren’t listening to their pilots, the individuals literally in the cockpits, then who will they listen to? Air travel is not exactly a low-stakes industry, so it’s worrisome when profit is clearly winning out over quality. It’s no secret that the airline industry, particularly in the last decade, has been wildly dependent on stock buybacks to give the appearance of greater economic viability. In a stock buyback, a company will choose to purchase its own shares from shareholders, and it will take these shares entirely from the market. That gives money to shareholders and lowers the number of shares outstanding. This will temporarily increase, for example, the reported earnings per share because you are basically dividing the same earnings number by a lower number of shares outstanding. According to an article from Business Insider, “Stock buybacks have been particularly prevalent in the airline industry over the last ten years or so. Airlines like American and Delta poured billions into stock buybacks in the years before the pandemic. For instance, in 2019, American spent $12.6 billion paying its employees. But, from 2013 to 2019, they spent $12.9 billion on stock buybacks.” According to Sara Nelson, the international president of the Association of Flight Attendants, "There was so much pressure on the airlines to announce these huge stock buybacks as they were trying to encourage people to invest in airlines again. But a huge portion of the profits went to stock buybacks that don't reinvest in the company, that don’t contribute to the long-term success of the airline, that don't invest in the workforce." When the pandemic hit in early 2020, there was significant pushback against the airline industry asking for billions in bailout money when they had been pouring billions into stock buybacks. For instance, in March 2020, Bloomberg found that the largest airlines had spent a stunning 96% of their cash flow on stock buybacks over the previous decade. At the beginning of the pandemic, Nelson and other industry advocates pushed for a ban on stock buybacks for airline companies. However, they were only able to secure a temporary ban that ended in August of 2022. Nelson says that, while it’s incredibly irresponsible and short-sighted for airline companies to put initial pandemic profits directly into stock buybacks, it has become the expected modus operandi for the industry, completely free of consequence. "Congress should be looking at what it looks like when you actually have a company focused on the business," she said, "and not constantly having pressure from investors to siphon off those profits for shortterm gain for investors and long-time harm to the company — direct harm to the people on the front lines and the customers who are trying to get a service." Issue 4 • 2022 19
When an industry is not investing capital into its infrastructure and its employees, meltdowns like the one Southwest experienced should be expected. These are inexcusable business practices that can only be defended in a context where profit is the only thing that matters. When an industry – and Southwest is just the most egregious example of an industry-wide problem – is this untethered from basic tenets of business, then it becomes enormously concerning, particularly when it’s one that depends on safety and quality control as much as the airline industry. In light of recent developments, a bipartisan group of attorneys general sent an eight-page letter to Transportation Secretary Pete Buttigieg in December 2022, urging Buttigieg to strengthen proposed rules in response to the growing problem of flight cancellations and significant delays. The recommendations in the letter include the following: • Requiring airlines to advertise and sell only flights that they have adequate personnel to fly and support, and to perform regular audits of airlines to ensure compliance and impose fines on airlines that do not comply; • Making it clear that USDOT will impose significant fines for cancellations and extended delays that are not weatherrelated or otherwise unavoidable; • Prohibiting airlines from canceling flights while upselling consumers more expensive alternative flights to the same destinations; • Requiring that credits and vouchers for future travel that are provided by airlines in the event of cancellation can be used easily without inappropriate limitations. The letter makes a number of excellent recommendations that may curb certain issues. Still, it’s a matter of the Department of Transportation actually enforcing them and having mechanisms to make airline companies truly reform. Americans are used to politicians making a lot of empty promises, warning of the consequences of corporate malfeasance without actually following through. This is the baseline expectation at this point, sadly. The Southwest holiday fiasco provided Americans with a real-time, concrete example of how cutting corners and short-term thinking can prove disastrous down the line. We rarely see this kind of lightning-bolt moment, where everything hits a crescendo so blatantly. It allows us to understand that when profit becomes so all-consuming that a company can’t even focus on the core elements of its business model, there needs to be serious reform before we reach even more severe crisis points. n 801.676.9722 | 855.747.4003 sales@thenewslinkgroup.com ARE YOU READY FORGROWTH? ADVERTISE IN THIS MAGAZINE TO ROCKET YOUR BUSINESS FORWARD. 20
Western Commerce Announces Acquisition Western Commerce Bancshares of Carlsbad, New Mexico, has agreed to buy Western Bancshares of Clovis, New Mexico. Western Commerce, the holding company for the $617 million-asset Western Commerce Bank, said in a statement that it expects to complete the purchase of the $64.4 million-asset parent of Western Bank of Clovis in the first quarter of 2023. n Gary Don Forrest, 59, of Carlsbad, passed away on Oct. 12, 2022, at his home. He was born to Robert Forrest, Sr. and Barbara Perini Forrest on May 22, 1963, in Carlsbad, NM. In time, we would realize that his birth would be the catalyst that changed the trajectory of Carlsbad forever, because, without Gary, CARC Inc. would not exist today. CARC, Inc. provides services for people with special needs, enabling them to be active local citizens, feel accepted by their community, and find meaning in their lives. Gary had a strong work ethic and was always ready to go to work and earn his paycheck. He was most recently employed at CNB Bank as a paper shredder and, in the past, worked at CARC in both the Green House and Egg Production. He was an avid Dallas Cowboys fan and enjoyed participating in sports, competing at the local, state, and national levels of the Special Olympics, where he played softball, bocce ball and was on the swim team. He also enjoyed attending all the special events at CARC with his friends, especially the dances. To know Gary was to love Gary, as he had a zest for life and lived it to the fullest. He was known for being very social and loving all people, but spending time with his family was particularly special. Gary is survived by his parents, Bob and Barbara Forrest; brother Robert Forrest Jr. and his wife Brenda of Carlsbad, NM; brother Michael Forrest and his wife Jo of Odessa, TX; nephews Jesse, Jeff, Michael, and Ross Forrest and niece Lee Forrest Emerson; uncle Dale and wife Karen Perini of Albuquerque, NM, uncle Richard (Dick) Sr., and Betty Forrest and aunt Gloria Wilson, all of Carlsbad. Gary will be missed tremendously by all those he knew and touched. n IN MEMORIAM GARY DON FORREST BANK NEWS 22
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