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How Will CFPB's Action Against Navy Impact Reg Reform?

Will the Consumer Financial Protection Bureau's $28.5 million fine against Navy Federal Credit Union give credit unions an even stronger platform to call for changes to the bureau, or does it give the regulator all the more reason to dig in its heels in refusing to provide an industry-wide exemption for credit unions?

Earlier this week, the CFPB fined the world's largest credit union for improper debt-collection practices, with Navy agreeing to pay about $23 million in redress to victims along with a civil money penalty of $5.5 million.

Dan Berger, president and CEO of National Association of Federal Credit Unions (NAFCU), described the fine as "governance by enforcement action," rather than regulation.

"It further underscores the need for greater clarity from the CFPB – and all regulators – which NAFCU has long advocated for," Berger said in a statement. "We strongly support robust consumer protections and believe both the financial services industry and consumers benefit from clear rules of the road."

The news of Navy's fine came on the same day as a court declared the CFPB's structure to be unconstitutional – a move which Berger said highlighted the need for an immediate moratorium on all rulemaking from the bureau.

As reported earlier, CFPB said that Navy FCU made "false threats" about debt collection to its members and that it also "unfairly restricted" account access when members had delinquent loans.

CFPB Director Richard Cordray said in a statement that Navy Federal "misled its members about its debt collection practices and froze consumers out from their own accounts." Financial institutions, he added, "have a right to collect money that is due to them, but they must comply with federal laws as they do so."

Investigators also found that Navy FCU "deceived" consumers to get them to pay delinquent accounts, by falsely threatening "severe actions" when it actually took no such actions or did not have authorization to take such measures.

CFPB estimated that hundreds of thousands of consumers were affected by these practices, which occurred between January 2013 and July 2015.

The practices, the bureau added, also violated the Dodd-Frank Wall Street Reform and Consumer Protection Act – the legislation which arose in response to questionable conduct by for-profit banks and other financial institutions which were largely blamed for the Great Recession.

The credit union, which primarily serves members in the armed forces and their families, stated that where its collections practices have come up "short" in the CFPB's estimation, it has "made all the necessary changes. We have cooperated with the CFPB throughout the process."

'Nuisance Suit'?

Credit union watchers didn't express much worry over how the ruling would affect Navy Federal, but plenty of questions remain regarding the long-term impact on the entire credit union movement, which views itself has having looked out for consumers' best interests since long before the bureau was established.

Geoff Bacino, a former NCUA board member and now principal of Bacino & Associates, said he doesn't think this fine will in any way impugn Navy's reputation and suggested that the case against Navy FCU might have been similar to a "nuisance suit" which the credit union quickly paid to "make it go away."

Dennis Dollar, a former NCUA chairman and now an Alabama-based credit union consultant, said that Navy FCU, like all financial institutions that face regulatory and supervisory findings, "fixed the problem that the CFPB thought was in need of addressing and it appears cooperated fully with the agency – whether they agreed or not with the facts cited by CFPB – so that such a finding would never happen again." He added: "That is how a well-run institution handles a regulatory or supervisory finding."

Dollar also said that he doesn't think this fine "adversely impacts" credit unions or Navy FCU itself, aside from the financial costs of repaying the money to their members and the fine.

But credit unions have long complained that CFPB imposes too many costly and unnecessary regulatory and compliance burdens upon the movement.

Indeed, Dollar took a harsh stance against the agency itself. Citing a recent appeals court ruling that said the bureau's structure is unconstitutional, the CFPB, he predicted, will now be "bringing forth every finding and assessing every fine possible" in order to make the political case for its own viability.

"I think Congress knows that the CFPB is on shaky legal ground and – depending upon the outcome of the election and who controls Congress and the White House – there could be some reform of the CFPB structure that is sorely needed," Dollar told CU Journal. "The CFPB will stay on this march as long as they are under attack for their questionable structure from a constitutional viewpoint. It is their strategy of defense to play offense and hope the headlines keep them in business."

Dave Adams, CEO of the Michigan Credit Union League, called the ruling on CFPB's constitutionality a "great validation for the need for reform," adding that the bureau should keep its focus off of credit unions and on the big banks and other actors that led to the financial crisis.

CFPB, he said, currently has "unbounded authority" to disrupt the highly competitive financial services industry that is already heavily regulated. "At the very least, the CFPB should focus on high-risk, systemic threats to our country's financial system," he proposed.

But Keith Leggett, a former senior economist at the American Bankers Association and an expert on credit unions, said he believes the Navy FCU episode will make it "very difficult" for the credit union movement to argue for an industry-wide carve out from CFPB regulation and oversight. "Navy's mistreatment of its members undermines the industry's claim that they treat their members fairly," he commented.

More Ammunition

But some legal analysts don't believe the Navy fine will be big enough to impact anyone's perspective.

"If you are pro-credit union you will see this as it is – not a major issue," said Michael M. Bell, attorney and counselor at Howard & Howard Attorneys in Royal Oak, Mich., who specializes in representing credit unions. "If you are anti-credit union you will add this to your stack of ammunition."

And those on the banking side will definitely use it as ammunition, said Leggett.

"I expect bank trade groups will use this to tarnish the credit union industry's 'white hat' image," he told CU Journal. "Just as the credit union industry used Wells Fargo's scandal to take shots at the banking industry. After all, you should never let a serious crisis go to waste."

However, Bell said that – unlike the massive fraud at Wells Fargo – the problems at Navy simply aren't significant enough to substantively change the way lawmakers and regulators view credit unions.

"In fact it is premature to even paint Navy Federal in a bad light based on this," Bell said. "I think everyone can agree there are two sides to every story and the compliance arena is filled with landmines. I believe there is a difference between intentional practices that violate regulations and unintentional or technical violations."

Amanda J. Smith, a partner at Messick & Lauer, a law firm based in Media, Pa., told CU Journal that the debt collection practices uncovered at Navy FCU will not reflect poorly on the credit union industry as a whole. "But since we do not know the exact details of the CFPB's enforcement action against Navy, there's some uncertainty surrounding all this," she said.

Smith, who focuses on consumer regulatory compliance matters, also said that those entities that may espouse anti-credit union rhetoric might be slightly emboldened by the fine slapped on Navy FCU, but overall most players in Washington and elsewhere view credit unions quite favorably.

In addition, Smith does not think that CFPB will necessarily become more aggressive in its dealings with credit unions. "Quite the contrary, in fact, the CFPB has actually praised credit unions for their exemplary behavior," she said.

In spite of the enforcement action taken against Navy FCU, Keith Leggett believes the CFPB has a "positive image" of credit unions. But, he added, "The agency also recognizes that credit unions are not saints and may not have the strongest compliance cultures."


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