ONTARIO,Calif.-During a July 19 hearing by the House Financial Services Subcommittee on Oversights and Investigations furthered the Dodd-Frank compliance debate. While one credit union testified as to being unharmed by new regulations, another took the opposite position, especially when it comes to more compliance rules.
No doubt the majority of credit union leaders would agree with the latter's position, as "compliance burden" remains a chief complaint of many CU executives. Most continue to seek affordable solutions to ehlp manage that burden.
"Did you see what happened during the hearings-how does it not harm credit unions?" questioned Linda Pettit, CEO of the 1,700-member, Ontario-based California Center Credit Union. "For a shop like mine, Dodd-Frank is a significant concern. While we are now compliant, it came at a great cost and has made us less efficient. Typically, with new regulations, there are many internal work-arounds until your vendors can find efficient solutions."
But that hasn't been the case with Dodd Frank, and not just at small CUs. NAFCU, for instance, submitted a letter to the Financial Services Subcommittee that said, in part, "With no end in sight, the steady stream of mandated regulation coming from the Dodd-Frank Wall Street Reform and Consumer Protection Act, including those regulations expected from the Consumer Financial Protection Bureau (CFPB), only adds to the existing compliance burden our nation's credit unions already face from the National Credit Union Administration and various other agencies. Many regulations may be well-intentioned to correct the abuses of some bad actors in the financial services arena, but for credit unions, they are often a solution in search of a problem."
A Hot Potato That Remains Hot
This political hot potato is nearing its second anniversary and whether or not Washington makes revisions to the aforementioned regulations, credit unions have marching orders. "Prior to these regulations there was a ton of rigor that credit unions didn't have to document, because they weren't asked, so now it's just not complying with the new regulations but also the old rules that weren't enforced," said Andy Greenawalt founder and CEO of the Continuity Control, a software company founded in 2008 that offers solutions in the area of compliance.
Greenawalt noted that over the last five years, there have been approximately 645 regulatory updates. Keeping up with these regulations has many credit unions focusing on compliance rather than membership needs.
"I don't think credit unions necessarily underestimate Dodd-Frank, more likely they just don't understand how it is implemented through the CFPB. It's not the document itself, but all of the rulemaking coming off of it," said Greenawalt.
As an example of how complex regulation compliance can be, Greenawalt explained that the recent change in disclosures by the CFPB was more than 1,000 pages. "The process of studying these new regulations will take us weeks to process and develop responses to the various elements within it," he said. "So, it will take a month with a team of a dozen experts. Credit unions all seem to understand that it will cause them a lot of time and money, but they don't seem to truly understand how."
On average, he said credit unions usually stumble over a few common compliance regulations. "There is complexity, confusion and ever-evolving regulatory guidance concerning mutli-featured open-end lending controls, and real estate lending in general. It is so complicated that one little hiccup in the process can really mess everything up especially for small credit unions that typically have very limited expertise."
Greenawalt added that there is also new regulatory scrutiny over interest rate risk programs and third party vendors not executing due diligence. "Regulators seem to focus in an inordinate amount of time on Bank Secrecy Act forms related issues especially the proper completion of Currency Transaction reports and Suspicious Activity Reports."
As a result, credit unions are overwhelmed trying to implement a growing number of compliance rules.
"This is really a conundrum for a small credit union and these regulations have us operationally hogtied," said California Center CU's Pettit. "At the end of 2010 we realized that we needed professional regulatory expertise, so in 2011 we had to hire an outside compliance firm. Annually this is more expensive than our legal and auditing expenses combined."
While new regulations require a compliance officer either onsite or subcontracted, most credit unions can barely afford the expense, which gives rise to vendors offering less expensive technological alternatives.
"We offer a complete compliance platform that is one-third the cost of a compliance officer," said Greenawalt who explained that a "subscription" to Continuity Control offers credit unions innovative, ease of use tools to manage compliance.
Serving more than 45 CUs, Greenawalt noted that in the last year he has fielded more calls and added more clients as a result of Dodd-Frank.
Still Have't Felt The 'Brunt'
"We still haven't seen the brunt of Dodd-Frank or increased examinations yet," said Greenawalt. "Every year credit unions are investing in more compliance but not modernizing the process. They are investing in horse drawn carriages while cars are available."
While a third of the cost of a compliance officer can be seen as a considerable savings, for small credit unions it is still too costly. "I receive between two and six vendor calls a day for various reasons, but most vendors do not understand the day in the life of a small credit union, our needs and our price point," said Pettit. "When it comes to these compliance regulations, we are dealing with a power higher than us."