BEAVERCREEK, Ohio-By all accounts, Nadine Vichich is looking forward to the retirement that will be coming her way sooner rather than later.
After a lifetime spent in the credit union movement, she faces a rapidly changing regulatory and compliance environment that, at best, can be called challenging for America's small financial cooperatives.
As the CEO and chief compliance officer for $13-million Countywide Federal Credit Union, Vichich says serving her members has only become more difficult over time. After 30 years at the credit union, she has seen a steady decline in the number and type of services she is able to offer those who live and work in Ohio's adjoining Greene and Montgomery counties. The service decline, she says, is due largely to the growing compliance requirements facing credit unions and other financial institutions, many of which are hamstrung by the growing number of regulations.
"Compliance issues have increased exponentially over the past five to 10 years," Vichich says. "Right now, they are overwhelming."
Increased compliance requirements have forced Countywide FCU to abandon first-mortgage loans, adjustable rate loans and purchase money lending. Vichich also ended the credit union's in-house credit card program due to compliance requirements, leaving her with a lending portfolio limited to installment loans, fixed-rate home equity loans and auto loans, even though she finds the latter difficult to market due to 0% finance offers by area car dealerships.
The resulting loss of income from loans has made it difficult for Countywide FCU to maintain a healthy loan-to-share ratio, Vichich said. Increasing compliance requirements broadly applied will also make it difficult for the credit union to remain competitive and viable in the future.
"The compliance burden is too great for some credit unions," Vichich says. "The result is that consumers may have to pay more, and yet still have fewer service options from which to choose."
And that, as Vichich and others already know, is a reality that runs counter to the intent of those creating the laws.
If Vichich had the power to change the way credit unions are regulated, she would assemble a task force of small credit unions to educate regulators about how their decisions affect credit union operations. Each credit union faces its own unique set of challenges when it comes to accommodating the types of regulations that has caused small credit unions like Countywide to drop some of its services, she explains.
"I appreciate that regulators are trying to serve people, but to make decisions with limited small credit union input is just not going to work," she says.
A New Regulator in Town
Vichich speaks for many in the credit union community. While credit unions massed in Washingon this week for CUNA's Governmental Affairs Conference will focus primarily on protecting the tax exemption and once again seeking expanded member business lending powers, it is regulations that have the greatest tangible effect on their operations. New regulations, primarily those issued by the recently minted Consumer Financial Protection Bureau (CFPB), have been arriving at a fast and furious pace since late last year. The number of regs and the rapidity with which they're being issued is bringing many credit unions to the tipping point, and the cost of compliance is pushing some credit unions over the edge.
As all credit unions know, complying with those regulations will take staff and board education, not to mention changes in forms, IT applications and marketing efforts. Regulators, and especially the CFPB, sometimes fail to recognize what's involved with compliance, say many credit union compliance officers.
The inability, or maybe unwillingness, to understand is leading to the loss of services for institutions of all sizes and sophistications. Unfortunately, the number of new regulations doesn't show any sign of slowing down as credit unions struggle to keep pace with the proposed changes.
"The regulatory situation is a lot like the weather these days," says Steve Gibbs, AVP of shared compliance resources for the Texas Credit Union League (TCUL). "It's upside down."
The CFPB, formed to execute the directives of the Dodd-Frank Wall Street Reform and Consumer Protection Act, has its own compliance mandate from the U.S. Congress when it comes to keeping pace with the 2010 statute's guidelines and deadlines. Beginning with proposed changes to remittance regulations launched last year, the CFPB has this year already taken on mortgage lending and student financial relationships, delivering mandates at a feverish pace. The bureau's relative newness makes it an untested, untried commodity, Gibbs says, which adds to an uncertain future for credit unions.
Complicating all of that is uncertainty over the agency's leadership, which is now caught up in a dispute between Republicans and Democrats in Congress (CU Journal, Feb. 11).
"We're facing a new agency that we don't know and we have no idea how it will react to situations," Gibbs says. "This is the perfect storm for regulatory issues."
Not A Breaking Point-Yet
As a result, credit unions are finding themselves drowning in a regulatory tsunami caused by conditions they largely didn't have a hand in creating, and are forced to try to ride out the more rigorous regulatory seas that have resulted. While only credit unions with $10 billion or more in assets-currently four institutions nationwide-fall under CFPB's direct authority, the tremors caused by changing regulations can be felt across the entire credit union movement.
"It's challenging, but we're not at a breaking point," says Devon Lyon, compliance manager with $1.3-billion State Department Federal Credit Union in Alexandria, Va. "However, if the regulators keep issuing new rules without retiring old ones and we don't have the time to catch our breath in between them, that's when we could hit the breaking point."
Dodd-Frank, named for developers Sen. Chris Dodd (D-Conn.), then chair of the Senate Banking Committee, and Rep. Barney Frank (D-Mass.), former House Financial Services Committee chair, was introduced in 2009 in response to the global financial crisis and specious consumer financial practices that helped fuel it. The bill, signed into law by President Obama on July 21, 2010, contained the most sweeping financial reform regulations since laws enacted following the Great Depression of the 1930s.
In addition to promoting greater financial transparency on Wall Street and among businesses, Dodd-Frank stressed increased consumer financial protection standards, driven in part by the unscrupulous mortgage lending practices by some for-profit financial institutions. The law also called for the formation of the CFPB, which reports to both the Senate Banking Committee and House Financial Services Committee.
CFPB's mission, of course, is to work on behalf of consumers to assure they are treated fairly by financial service providers of all types, including credit unions. Specifically, CFPB is charged with carrying out consumer financial laws, including promoting financial education, restricting unfair and unscrupulous financial practices, and monitoring the market for new potential risks for consumers, among other things.
"Over time we'll judge our efforts by determining if consumers are being treated fairly and with more candor and clarity in the financial marketplace," says Richard Cordray, nominated by President Obama to head the bureau, in a video on CFPB's website. Given the pace at which the agency has introduced new regulations, CFPB is creating a fast track for its success, one that continually challenges financial institutions to keep pace.
Death By A Thousand Cuts
"The CFPB is basing its success and performance on the number of consumer complaints it receives," says Chris Collver, vice president of compliance at $655 million Altura Credit Union in Riverside, Calif. "It's not that each rule is so time consuming, but taken together this is like the death of a thousand cuts."
Cordray himself seems to support Collver's assertion. The CFPB chief noted during a Feb. 5 town hall webinar hosted by the National Credit Union Administration (NCUA) that the bureau had responded to more than 100,000 consumer complaints since opening its doors last year. CFPB has a strong consumer approach that aligns with credit unions' member-service philosophy, one that bureau officials claim to admire and support. However, credit union industry officials believe they could be more effective in understanding and anticipating how their regulations affect credit unions in terms of time and implementation needs.
"(CFPB) has been good about giving us the opportunity to express concerns, but there could be a better understanding about what credit unions need in order to meet the bureau's guidelines," says Kathy Thompson, SVP of compliance and legislative analysis for CUNA. "This is a beginning process for all of us."
Pursuing A Rigorous Agenda
Credit union compliance officers are no strangers to the issues that CFPB has already embraced. In the case of remittances, reassignment of responsibility under Dodd-Frank gives the agency new authority over a process familiar to many credit unions serving foreign workers in the U.S. It also has brought the service to an end for many institutions.
A proposed rule, published in the Federal Register on Dec. 31, 2012, seeks to amend subpart A to create a subpart B of Reg E, which implements the Electronic Fund Transfer Act, in three areas. First, the proposal would provide additional flexibility regarding the disclosure of foreign taxes and fees imposed by a designated recipient's institution for receiving a remittance transfer.
Second, the proposal would limit a remittance transfer provider's obligation to disclose foreign taxes to those imposed by a country's central government. Third, the proposal would revise error resolution provisions that apply when a remittance transfer is not delivered to a designated recipient because the sender provided incorrect or insufficient information, especially in the case of an incorrect account number that may result in the funds being deposited in the wrong account.
Senders also have 30 minutes in which they may cancel their transaction and receive a full refund. Credit unions may be held liable for any errors made by senders, including those due to an incorrect account number at foreign banks receiving the transaction.
As reasonable as the aforementioned provisions may sound from a consumer-friendly regulatory point of view, making credit unions liable for member errors in terms of account information and saddling institutions with the need to understand tax burdens in foreign countries is forcing many institutions to drop remittances as a member service.
"When we process remittances to foreign countries, they often go through several financial institutions, all of which may assign different fees and interest rates," says Collver, who oversees a compliance department of four people. "Under CFPB's proposed regulations, members have 30 minutes to retract their transmissions, a time period in which the exchange rate can change many times. We simply can no longer offer that service, because we physically can't comply with those regulations."
Cordray acknowledged the hardship caused credit unions during the Feb. 5 NCUA webinar and said the bureau would reconsider those two specific requirements.
In The Crosshairs
The providing of financial services to students has become one of the most recent areas to appear in CFPB's crosshairs. How colleges and universities market financial services through arrangements between the schools and financial institutions may well become the subject of future bureau scrutiny. In addition to marketing practices, the CFPB is currently seeking information on what rates are charged and services offered, and the type of marketing and business relationships that exist between financial service providers. Debit cards, especially those tied to student loans and scholarships, and other services offered by credit unions with relationships to various campuses may be reviewed.
But it is new regulations involving first mortgages may be causing credit unions the greatest amount of heartburn. Both the variety and rapidity with which the rules are being issued have made compliance sometimes more than just challenging exercise.
"Mortgage loan changes that have come and other changes that may be coming have kept credit unions in limbo or a state of transition," says Jeff Andersen, an attorney with PolicyWorks, a regulatory and compliance consulting division of the Iowa Credit Union League. "It can be a bit of a juggling act."
CFPB started the year Jan. 10 with the issuance of the Ability-to-Repay Rule, designed to keep lenders from making mortgages to consumers who can't afford them. Consumers need to offer verifiable proof to lenders that they have the ability to repay the loan for which they're applying.
That same day the bureau issued rules further protecting consumers from high-cost mortgages by updating the Home Ownership and Equity Protection Act (HOEPA), issued in 1994. The ruling revises rate and fee thresholds, adding new limits to risky loan features, a new coverage test based on the transaction's prepayment feature, and other consumer protection safety nets.
A week later CFPB issued strong guidance governing how mortgage borrowers facing foreclosure should be treated, including restricting controversial dual-tracking procedures through which lenders are able to work with borrowers to avoid foreclosure while pursuing foreclosure actions against those same borrowers at the same time. Rules regarding granting borrowers access to their credit reports followed shortly thereafter.
Such consumer-protection procedures, many of which already are common credit union practice, nevertheless require compliance adjustments among institutions scrambling to keep pace. But the most compelling issue has less to do with the regulations with which the credit union currently must cope and what may be coming down the road.
"Most credit unions can manage the current compliance burden, but when things are constantly changing keeping up becomes difficult," says Andersen. "There were 3,507 pages of mortgage rules issued by CFPB in the last month alone, and that's more rules finalized already this year than I can ever remember."
The CFPB may have the spotlight at the moment, but their regs are not the only ones affecting credit unions. NCUA and state regulators still set the pace for the nation's 7,000 credit unions, but that's only the beginning. The Federal Reserve, the Treasury Department, the Department of Justice, the Federal Trade Commission, Housing and Urban Development and others offer their own sets of regulations to keep credit unions and other financial service providers on track.
But the regulatory explosion over the past few years has muddied that track and made the going slower for most credit unions, even those with multi-person compliance requirements, in trying to keep pace with the changes. In most cases, the impact of regulations' "cumulative burden" is beginning to take its toll, says Steve Van Beek, director of regulatory compliance for the National Association of Federal Credit Unions (NAFCU) in Arlington, Va.
"In years past we might have seen one new regulation issued every quarter, says Van Beek. "But having multiple regulations issued in a matter of weeks has created an environment that is extremely cumbersome."
The negative impacts are compounded for credit unions like Countywide, small institutions in which the CEO also acts as part-time compliance officer. CFPB's rigorous remittance proposal is a prime example of what can happen to credit unions trying to adjust to the current, constantly changing compliance climate.
"If you are still trying to determine whether your credit union can offer remittances in 2013, then you probably can't," van Beek says.
Operating In Silos
M of the problem stems from efficiencies at the regulatory level itself, as well as the wide-ranging power Dodd-Frank has given the CFPB to aggregate and enforce virtually all consumer financial protection issues. NAFCU has encouraged the Financial Stability Oversight Council, established as part of the statute, to do a better job coordinating even the seemingly slightest issues involving new regulations, such as coordination of compliance dates, so credit unions can better handle the required compliance processes.
"Regulators sometimes operate within their own silos, and they need to do a better job talking to each other," van Beek says. "Once the regs are in place the burden falls to the credit unions to demonstrate why the requirements should go away."
While the current regulatory overdose may continue, it's not likely to escalate, van Beek says. But the burden of meeting compliance standards while adjusting to new issues will continue, calling for credit unions to step lively in the ever-changing environment. One way to reduce the burden, van Beek says, may be to clean house on regs that no longer apply. But that's easier said than done.
"Changing laws usually requires an act of Congress and is a very high hurdle to vault," he explains. "We need to find an easy way for existing regs that no longer address the realities of the marketplace to be removed."
While outdated laws may not be eliminated anytime soon, the dynamic environment may have regulators exploring a variety of avenues, including renewed interest in long-standing laws. In the meantime, managing in today's tumultuous compliance environment translates into perhaps spinning too many plates, says CUNA's Thompson.
"People need to think of compliance in three distinct ways," Thompson says. "There are new compliance developments, new and changing product aspects, and what I call 'keeping your regulator happy.'"
The balance these components take likely differs for each credit union, but currently CFPB is driving the new compliance development environment. Because the new regulations are largely driven by statute through Dodd-Frank, CFPB can do little but enforce the laws as written. CUNA and other trade groups have expressed concerns over applications of the laws, which tend to address the broader industry while catching credit unions in their sweep. CFPB has acknowledged credit unions' member orientation as the bureau's preferred model, but that preference doesn't always translate when it comes to practical applications.
"One of the mortgage rules introduced last month had to do with high-priced mortgages," says Altura's Collver. "No one does those kinds of mortgages anymore, but we still have to go through the compliance steps to make sure the credit union is never able to offer those products."
An Unnecessary Exercise
The idea of regulating lending practices that no longer exist may be the way to avoid a future financial meltdown in the eyes of Congress, but it becomes a time-consuming and largely unnecessary compliance exercise for credit unions, Collver stresses.
"Altura has never offered those loans, but we have to put controls in place to make sure the language doesn't slip into our text," he says.
CFPB can also do a better job understanding the rigors credit unions face in complying with the rules it sets forth, Thompson says. Compliance obligations permeate the entire credit union, or they should in terms of involving all business units in the process. The issues especially come to play in the introduction of new products, virtually all of which have some compliance component to them, she says.
Spinning Too Many Plates
"Credit unions, when you want to introduce new products, please have your compliance people at the table if you want to save some pain and suffering down the road," she explains.
If Thompson could change the way credit unions are regulated, she'd start at the institutional level
"The credit union needs to provide adequate resources, the people to do the job and access to outside counsel," she says. "Compliance isn't an isolated function sitting in the corner. It needs to be part of the team."
Thompson also sees potential redundancies between federal and state regulations as an unnecessary stumbling block, urging regulators in both camps to reduce redundancies. But regulators say that is not their intent.
"Regulators at all levels don't want to make things burdensome for credit unions," says Mary Martha Fortney, president and CEO of the National Association of State Credit Union Supervisors (NASCUS) in Arlington, Va. "We'd hope federal and state regulators are in sync to make sure state- and federally chartered credit unions are regulated in the same way without conflicts."
The Texas league's Gibbs is a bit more critical. He notes that in Texas and the five other states in which Gibbs and his staff provide compliance consulting services to credit unions, the more restrictive law, be it state or federal, generally takes precedence.
Still, he added, "There seems to be a good relationship between NCUA and the state examiners. They sometimes go out into the credit unions together."
The greater compliance problems occur when credit unions are not given ample time to comply, given the complexities of the compliance process. Gibbs feels a year is the optimal timeframe to comply with new regulations, not the few weeks and months that current practice seems to dictate.
"To be given less than six months to comply is unconscionable," he says.
But he also cites problems at the credit union level, not the least of which has to do with lack of qualified staff. "There is a genuine lack of trained compliance professionals among credit unions today," says Gibbs, who served with the Federal Reserve, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. before coming to the Texas league. "Part of that has to do with old attitudes among credit unions that don't want to invest in compliance because they don't feel the laws will give them any trouble."
Such an attitude of carelessness and lack of understanding on the part of the credit union can be dangerous. However, in Gibbs' mind there may be a better way to address the situation.
"Current regulations will affect $1-million credit unions in the same way they will affect $100-million credit unions," Gibbs says. "I'd exempt credit unions of less than $25 million in assets and those that deal in non-complex services from many of the requirements.
"I'd also slap on more time between when the action comes out and when it becomes effective," he adds. "We have got to have some adequate buffers."
A Structure, Not Just Rules
Despite the prevalence of CFPB in current headlines, NCUA is still the primary credit union regulator for federally insured credit unions. The agency is charged with enforcing most rules, including those contained in Dodd-Frank, and views the current regulatory environment that, while intense, as necessary to preserving credit unions' safety and soundness.
"We do not view regulation as a static thing, but put a great deal of emphasis on adapting and modernizing to keep pace with changes in the industry and the economy," says John Fairbanks, NCUA's public affairs specialist.
The agency is charged with working with CFPB and other regulatory bodies, providing a more focused credit union "lens" to help guide regulatory development that supports the industry while protecting some 95 million members served and $1 trillion in assets held by the nation's federally insured credit unions.
Despite their longstanding oversight, the pace of regulatory changes has never been as rapid as it has been since CFPB entered the scene.
"We saw some changes from NCUA last year, but they were not as burdensome as those from CFPB," says PolicyWorks' Andersen. "I don't foresee many, if any changes from NCUA or agencies other than CFPB in 2013."
NCUA is attempting to ease the overall compliance burden and has been for some time through its Regulatory Modernization Initiative, Fairbanks says. Last year's rule on Troubled Debt Restructuring gave credit unions the flexibility to modify loans without tracking them manually or immediately classifying them as delinquent. The agency will continue its planned review of 16 regulations in 2013 to make sure the rules are clear and easy to understand (see related story). The rules under review, part of the agency's three-year regulatory review cycle, are open for public comment with input due to NCUA's Office of General Counsel by Aug. 5.
In 2011, NCUA launched its Regulatory Modernization Initiative with the goal of streamlining existing regulations, targeting new regulations that address different needs of the industry, and seeking to minimize the regulatory burden overall. Steps have already been taken, including the establishment of the Office of National Examination and Supervision (ONES) to oversee the largest credit unions, and the redefinition of small credit unions from $10 million and under to $50 million and under. But in the eyes of some, the agency has a long way to go.
"NCUA's rules are very complicated," says NASCUS's Fortney. "They have two sets of rules, one for credit unions they regulate and one for those they insure."
NCUA would do well to reorganize their rules and regulations, Fortney stresses, making their share insurance regulations in a single or consecutive chapter of the agency's overall regulations. The move could ease any confusion federal and state regulators have when it comes to examining CUSIF-insured institutions. However, Fortney's suggestions to the regulator have not yet yielded a response.
"I have broached this issue with NCUA, but they have said that it was not a good time to review this idea due to other events currently going on," Fortney says.
Back in Ohio, Countywide FCU's Vichich agrees that NCUA should overhaul its regs, stressing the need for even more representation by small credit unions when it comes to developing and administering regulations. The CEO feels that NCUA's Office of Small Credit Union Initiatives is beneficial, but could be even more so in light of the regulatory squeeze so many small credit unions are feeling. She also would like to see more done to preserve and protect small credit unions, because of the intrinsic role they play in serving members.
"The challenges will only increase for small credit unions, and it's time for NCUA to acknowledge the fact that we are integral to the movement," Vichich says. "Small credit unions are where the credit union movement begins."
Efforts At Finding A Resolution
DIf credit union compliance issues are like the weather in that they're upside down, as TCUL's Gibbs says, then it's also true that, like the weather, regulations are always there and always changing. Everyone seems to agree that stormy conditions likely will continue to vex credit unions of all size and shapes in the years to come.
"It's gotten very burdensome for all credit unions, particularly small- to mid-sized institutions that don't have staff dedicated to managing compliance," says Rita Fillingane, vice president of research and collaboration for the California and Nevada Credit Union Leagues. "It's also a very costly process that requires changes to forms and the IT system, as well as specialized training."
One option for California's small credit unions may be membership in the CURoots Cooperative, a credit union service organization that was created by the California league and some of its credit unions to cut costs for common backoffice functions. That includes compliance training and management for small institutions. Participating CUs can access information and expert advice from compliance management to policy maintenance and get help with regulatory exams and external audits by tapping into a base of cooperative resources. Fillingane has a wish when it comes regulators. "I think it would be most beneficial to slow things down a bit in issuing new regulations," she says. "Statutory authority exists to delay compliance and make other concessions as necessary. It's important to review the regs to make sure that unforeseen issues do not arise among credit unions trying to comply."
TCUL's Gibbs agrees, but also cautions CUs not to stick their heads in the sand and assume the rules don't apply to them. "CFPB's agenda is huge," Gibbs says. "The bureau has been given broad powers over financial laws by an administration that is very consumer-oriented and will protect the agency for at least four more years. We have had good luck working with NCUA and state regulators, but CFPB is new territory."
For Altura's Collver, a former California league employee, helping credit unions understand the depth and breadth of what's in the pipeline may be challenge enough.
"There has been a huge amount work to do just to try and get our heads around what is happening," he says. "If I could wave a magic wand, it would be to help regulators, and especially CFPB, truly understand the burden credit unions face complying with all the regulations."
Shared Resources An Answer?
Shared resources like those offered by CURoots Cooperative, of which Altura is a member, may be the best and perhaps only alternative for credit unions trying to survive the regulatory deluge. Various state leagues, including the Texas league (which is seeking to merge with the Oklahoma and Arkansas leagues), also offer compliance education and consulting services designed to help credit unions address the new laws, a situation that Collver says isn't going to change.
"NCUA seems to walk the walk when it comes to understanding and addessing credit union compliance burdens, and that may be because over time they have seen increased efforts to comply," he says. "But CFPB is measuring its success on the number consumer complaints received, and that's an altogether different situation."
The best thing any credit union can do, Collver says, is get out in front of the regulation when it is first announced, share the information with board and staff and begin compliance procedures even if the proposed law is still a year away. "You have to do it early and often to save your own sanity and to stay ahead of the wave," he adds.
Even the best-laid plans take time and resources, and one of the best strategies credit unions can pursue is a pre-emptive strike, explains PolicyWorks' Andersen.
Andersen's advice: Make sure that effective communications channels exist between compliance officers and business units and that the compliance function is able to operate freely. And make sure the credit union's board is aware of all regulations as they are proposed and effective and has been fully briefed in what it takes to keep the CU operating in a safe and sound manner.
"Too often the compliance officer is seen as the bad guy, but the function should be part of overall business development from the beginning," Andersen says. "We're not talking about a huge sea change in the way that the credit union operates, just that the necessary steps are taken to make the compliance manageable."
