An unrelenting barrage of new credit union rules and regulations have jacked up the cost of doing business, forced hundreds of small CUs to merge or close and compelled many others to devote precious time and money to dealing with the seemingly endless blitz of overwhelming bureaucratic paperwork from Washington.
And that was just 2014. Get ready for more of the same in 2015.
John McKechnie, who has served in senior positions at NCUA and was the chief federal lobbyist for CUNA, said credit unions across the nation — regardless of size — have expressed their concerns with not only the pace of new regulations issued by government agencies, but by the rising costs associated with maintaining such compliance — costs that threaten the very existence of some smaller institutions.
Various federal agencies — including the Treasury Department's Financial Crimes Enforcement Network (FINCEN), The Federal Trade Commission, the Federal Reserve and NCUA — issue rules and regulations that impact credit unions.
However, McKechnie, a partner at Total Spectrum, a Washington-based legislative consulting firm, singled out the rules imposed by the Consumer Financial Protection Bureau (CFPB) as the most problematic for credit unions.
"Credit unions feel besieged by the sheer magnitude and increasing complexity of regulations that emanate from CFPB," McKechnie said. "They are the most aggressive government agency in terms of regulatory issues."
Geoff Bacino, a former NCUA Board member and president of Bacino & Associates, an Alexandria, Va.-based consulting firm, said CUs also feel "put upon" by the punitive nature of the ever-growing pile of regulations, especially since the movement had little to do with the excesses that led to the 2007-08 financial crisis and subsequent legislative backlash against banks.
This unfortunate set of circumstances has led to CUs unnecessarily taking the brunt of costly regulations designed to prevent another such calamity. Voices of discontent with regulations, especially the CFPB, come from far and wide.
Linda Sweet, president and CEO of Big Valley FCU, a $56-million credit union in Sacramento, Calif., spoke for many in the movement when she testifed before a congressional panel last year. She lamented that "despite the fact that credit unions are already heavily regulated... and actually helped blunt the [financial] crisis by continuing to lend to credit-worthy consumers during difficult times," that the breadth and pace of CFPB rulemaking "is troublesome as the unprecedented new compliance burden placed on credit unions has been immense."
In many cases, credit unions like Big Valley have not only suffered soaring compliance costs, some even had to outsource crucial mortgage and lending activities due to the high expense of hiring sufficient compliance capabilities — and that can deter some credit unions from being able to serve members. Sweet also referred in House testimony to the "thousands of pages of new mortgage regulations and guidelines from the CFPB" as a singular example of the compliance burden imposed upon credit unions.
Dover FCU president and CEO David Clendaniel put things in starker terms before another House subcommittee hearing this past summer when he declared that the growing regulatory burden on credit unions represents the "top challenge facing the industry" and that things are reaching a "tipping point" where it is hard for many smaller institutions to even survive.
The CEO of the $496-million credit union declared that "credit unions want to continue to aid in the economic recovery but are being stymied by over-regulation. Enough is enough."
Created under the auspices of the Dodd-Frank Act, CFPB is essentially led by just one man — director Richard Cordray, a Democrat appointed by Barack Obama. Some have called for the replacement of the single directorate structure at CFPB with a board of three to five members — an arrangement that would require Congressional approval of a new statute.
Among many other items of concern to credit unions, the CFPB's legislation governing mortgages — comprising laws related to ability-to-repay/qualified mortgage rules and servicing rules — which took effect last January — have caused particular distress for credit unions.
"These are like a work-in-progress," said JiJi Bahhur, NAFCU director of regulatory compliance at. "We are seeking to revise and revamp various amendments to mortgage rules, some of which may ultimately impede the ability of credit unions to make such loans."
Even with Republicans — who have been vociferous opponents of Dodd-Frank — taking control of both the House and Senate this year, McKechnie feels little will change either in the composition of CFPB's power structure or the seemingly endless stream of new regulations it imposes.
"Even if Republicans in the Senate and Congress can pass some changes to Dodd-Frank and seek to repeal some aspects of the more onerous regulations, the president still holds veto power," he noted. "As such, I think GOP lawmakers will only be able to implement some symbolic changes in the rules."
In fact, McKechnie points to one regulatory "victory" scored by CUs and banks last year against the CFPB — when the bureau agreed to delay the issuance of rulemaking concerning overdraft protection until July 2015. Dennis Dollar, an Alabama-based credit union consultant and former chairman of NCUA, described the CFPB as the "most activist" of the regulatory agencies impacting credit unions. He forecasts a particularly busy period of regulatory activity in the nation's capital — and an equal measure of pushback from opponents — over the next twenty-four months.
"I anticipate there will be considerable action from the CFPB [in 2015], particularly as the Obama administration heads into its final two years in office," he said. "And with the Republicans controlling both houses of Congress, the administration will seek to accomplish through the regulatory machinery of the federal government what they cannot get through Congress. I expect a very active next two years on the regulatory front, and I would predict that the CFPB will be at the forefront of that activism."
Dollar envisions a Washington arena where a Republican-controlled Congress will seek to rein in regulators with marathon hearings, Government Accountability Office (GAO) studies and greater oversight pressures.
"It is not going to be an enjoyable two years for regulators until the next presidential election in 2016 as the regulatory agencies are going to be the focal point of the executive-versus-legislative-branch power struggle," Dollar opined. "I expect an avalanche of both new regulations and new oversight hearings. It is going to be fascinating to watch to see which approach prevails."
Carrie Hunt, SVP-overnment affairs and general counsel for NAFCU, agreed and said she expects an atmosphere of "robust dialogue" in Washington over financial regulations.
Indeed, Richard Shelby, the Alabama Republican who will chair the Senate Banking Committee, has called for significant alterations to Dodd-Frank and there has been no sign he is willing to accommodate the Democrats. Consider that when the massive Dodd-Frank legislation (some 23,00 pages initially and now having morphed into 14,000 pages and counting) passed in July 2010, it did so with absolutely no GOP support in the House and only three votes in favor in the Senate.
Relieving the Burden?
Bacino, a former two-time federal regulator himself, suggested that one step NCUA could take towards relieving the burden of regulations would be to establish a more equitable, impartial and transparent appeal process when credit unions engage in disputes with regulators.
With respect to NCUA and its regulatory policies, Dollar offered both criticism and praise. Even though NCUA has taken some over-reaching actions recently that are questionable in both their authority to pass regulations and the adverse impact on growth of such regulation — such as the CUSO rule in the former category and the associational SEG [select employee group] proposal in the latter — NCUA has actually moved in the right direction on the issue of fixed assets with a more reasonable proposed regulatory approach, he said.
As a result, NCUA as well as other regulators have come under sharp criticism from credit unions. But a representative of NCUA, Larry Fazio, director of the office of examination and insurance, explained that NCUA is simply following the law as mandated by the terms of Dodd-Frank, which requires a multitude of new rules and regulations for financial institutions in response to the crises of 2007-08. He also maintains that many of the items that NCUA has promulgated were actually measures designed to provide regulatory relief. "We also have to keep pace with rapid changes in technology in the marketplace," Fazio added.
Similarly, Jon Bundy, regulatory compliance manager at CUNA Mutual Group, said the CFPB is finally clearing out its Dodd-Frank-related backlog, and will now turn its attention to a laundry list of potential new regulations, including: pay-day lending, pre-paid cards, etc
For the CU community as a whole, no single regulation is within itself cost-prohibitive, Dollar commented — rather, the cumulative weight of hundreds of such rules presents a costly financial and compliance resource burden upon them.
"The cumulative effect of so many regulations builds a very high cost and a lot of man-hours into the day-to-day operations of credit unions," he stated. "Regulatory compliance is costly and burdensome, always has been and always will be. Anything the government taxes or regulates will have a built-in disincentive that hampers growth in that arena. Industries and economies have to grow their way out of economic downturns such as the recent financial crisis. No industry or economy has ever regulated itself out of a financial crisis."
Among the major regulatory and compliance issues facing the credit union industry this year:
With margins shrinking on interest rate-based income producers like loans and investments, credit unions — like all financial institutions — are turning to more non-interest income sources to generate earnings and build capital.
One of the primary drivers of such non-interest income come from checking accounts because they produce interchange revenue when a member swipes his debit card and also generate occasional overdraft fees, Dollar explained.
But Dodd-Frank's Durbin Amendment put the revenue stream from interchange fees in some jeopardy, he noted, while the CFPB is looking to declare overdraft programs as an extension of credit which will — in Dollar's view — eliminate overdraft privilege programs "as we know them."
"Either action, or worse yet both, will adversely impact credit unions' — and all financial institutions' — earnings and capital building potential," he added.
Yet another huge compliance issue relates to data security and cybersecurity, said Hunt. Specifically, NAFCU has asked the Senate for action on the "Data Security Act of 2014," which would increase requirements for businesses without burdening financial institutions. NAFCU also urged Senate action on the "Cybersecurity Information Sharing Act," which would encourage information-sharing on cyberthreats among the businesses and the government while still guaranteeing privacy. The association also urged Congress to form a working group to develop legislative responses to data security breaches among retailers.
In October 2014, at a CFPB event that NAFCU president Dan Berger attended, Obama urged Congress to "act with urgency" on data breach legislation and he cited the variety of state laws on data security and called for "one clear national standard that brings certainty to business and keeps consumers safe."
CUNA has also asked the White House to form a cybersecurity council to track and monitor all data breaches suffered by businesses and consumers. Although credit unions are already heavily regulated with respect to data security, CUNA wants Congress to compel retailers and merchant groups to adopt the same data security standards as financial services companies.
"While merchants and financial institutions are both the targets of these attacks, a key difference is that financial institutions have developed and maintain robust internal protections to combat criminal attacks and are required by federal law and regulation to protect this information and notify consumers hen a breach occurs that will put them at risk," read a letter from CUNA to Congress. "In contrast, retailers are not covered by any federal laws or regulations that require them to protect the data and notify consumers when it is breached."
Reg Z — TILA
Credit unions are also concerned about the CFPB's amendments to Regulation Z under the Truth in Lending Act (TILA), which, among other things, restricts the ability of credit card issuers to provide credit card accounts to consumers who are deemed to be unable to make repayments, as well as the power to raise credit limits to existing account holders.
In addition, integrated mortgage disclosure requirements under the Real Estate Settlement Procedures Act and TILA, which is effective Aug. 1, will also be of great importance to credit unions, said Kris Stewart, principal regulatory consultant and senior manager of compliance professional services at Wolters Kluwer Financial Services in Minneapolis.
Stewart noted that the disclosure requirements represent the most significant revisions to these rules in 40 years.
"The regulation is much more than mere cosmetic changes to two loan disclosure documents, and it will affect U.S. mortgage lenders in unprecedented ways," she told Credit Union Journal. With 1,888 pages of identifying requirements and over 400 regulatory citation changes, it is being called an "industry game-changer."
The new rules include detailed requirements for producing and delivering the two disclosures in ways that will impact a lender's entire mortgage operation, including business processes, technology, policies and procedures, vendor relationships, employee readiness and training, and customer service, she stated.
"Failure to comply with these rules could result in unprecedented fines and penalties, costing thousands of dollars each day, lost business — and exposing lenders to substantial regulatory and reputational risks," Stewart warned. Moreover, despite the magnitude of change forewarned by these new rules, many lenders appear too slow in implementing a strategy to prepare for imminent changes.
"Lenders should definitely be alarmed by the TILA-RESPA rules," Stewart added. "The new documents are very, very different from the ones in use today and are very technical. And implementation poses a set of complex, complicated changes for one's entire lending processes and procedures. Developing a game plan to address all of these changes is something that needs to be done today, not tomorrow."
Stewart further advises that with so much at stake, it is "critical" that lenders develop a plan, not only to manage the document changes required by the new integrated disclosures, but one that addresses the operational and workflow changes and how they will implement those changes.