By David Adams
Recently, on the morning after the first presidential debate that saw President Barack Obama and Gov. Mitt Romney sharing their views on the costs and benefits of banking regulation, a small group of us met with 11th District Rep.-elect Kerry Bentivolio. As a former teacher, small business owner and a war veteran, Mr. Bentivolio is working to understand our issues as he prepares to take his seat in Congress.
As our credit union leaders from the 11th District shared the challenges that they face, their theme was consistent and strong: the volume of new regulations and an ever-increasing compliance burden is stifling their ability to lend to their consumer and small business members. As we discussed this challenge, Mr. Bentivolio's eyes widened as he recognized the correlation between over-regulation of financial institutions and his strongly held belief in minimizing the role of the federal government in our lives. This kind of grassroots lobbying, and ongoing education of our elected officials and candidates, is an important part of the role of MCUL and CUNA in helping our industry confront these huge regulatory challenges.
And with the recent election signaling changes in the make-up of federal and state politics and leadership, the MCUL and CUNA must continue to trumpet a message to both sides of the aisle that too much regulation is bad for credit unions and those whom they serve.
So, let me summarize the climate that we see as we work to help credit unions in this area. Our efforts are focused in three areas: Advocacy, Information and Implementation. I want to talk primarily about our advocacy efforts and the important issues we are facing right now.
With only a post-election lame-duck session remaining in this Congress, our highest priority remains persuading the Senate first, and then the House, to pass our legislation to raise the cap on credit union member business lending. Both the Senate and House versions of the bill would increase the MBL cap from 12.25% of assets to 27.5% of assets, and both include safety and soundness provisions that directly refute many of the banks points of opposition.
With time running out, this may be a legislative "Hail Mary pass,” but we and CUNA believe it is still possible to secure the necessary support needed after the November general election. After Thanksgiving this year, MCUL and a delegation of credit union officials and volunteers will again head to Washington to make a strong final case for passage of this legislation before Congress concludes its business for the year. If not, we will begin again from very strong footing with the next Congress in January.
In addition to MBL, we continue to shore up support for an array of regulatory relief measures, including supplemental capital authority, removing the duplicative physical ATM fee disclosure requirement, minimizing requirements for annual privacy notifications, and examination fairness. These efforts will all continue with the new Congress, should they fail to pass in the last days of this session.
In addition to these legislative issues with Congress, the fourth quarter of 2012 and early 2013 will see a surge in new regulations proposed and implemented, and credit unions will need to be ready for a fast-paced compliance environment.
This fall, the NCUA issued a pair of proposals of great concern to credit unions. The first proposal sets out a tiered plan based on asset size that would require credit unions to maintain access to and strategies for addressing liquidity in emergency situations, and the second would allow the NCUA to designate federally insured, state-chartered credit unions as being in “troubled condition.”
NCUA’s proposal on emergency liquidity would require federally insured credit unions with $10 million or more in assets to have a contingency funding plan that clearly sets out strategies for addressing liquidity shortfalls in emergency situations. Credit unions with less than $10 million in assets would be required to maintain a basic written policy that provides a board-approved framework for managing liquidity and a list of contingent liquidity sources to be employed if needed. Those with assets of $100 million or more would be required to maintain access to a federal backup emergency liquidity source, which could be demonstrated by becoming a regular member of the Central Liquidity Facility (CLF), becoming a member of the CLF through an agent, or by establishing borrowing access through the Federal Reserve Discount Window.
Emergency liquidity is an important issue for credit unions to manage, but we do not believe that a regulation is necessary to achieve the goals stated in the NCUA’s proposal. Adequate guidance and liquidity measures already exist for credit unions, and greater flexibility in emergency funding sources is needed, not less. The NCUA did not provide any compelling justification for increased regulation in this area, and therefore, MCUL opposed this proposal in its comment letter to the agency.
As part of this proposal, NCUA also requested comments on the costs and benefits of applying the Basel III liquidity measures and monitoring tools proposed by the Federal Reserve for banks to credit unions with assets of $500 million or more. The NCUA proposal stated that the Basel III measures might enhance liquidity risk management frameworks and improve credit unions’ ability to absorb shocks arising from financial and economic stress. However, banking industry observers have noted the extreme complexity of Basel III, and that community banks in particular are strongly opposed to its provisions.
According to a recent article in the American Banker, a heavy volume of cautionary and negative commentary was expected and received from banks and community banks on Basel III, whose comment period expired on Oct. 22. On behalf of smaller, community institutions, the proposal drew fire from senior congressmen sitting on the U.S. House of Representatives’ Financial Services Committee, and the ranking member of the U.S. Senate Banking Committee called for a cost-benefit analysis to be provided to Congress and the public.
Further, those proposed concepts were formulated without thought for credit unions’ unique structure and operational considerations. MCUL’s comment letter to NCUA opposed the application of Basel III’s liquidity measures and monitoring tools to credit unions, especially in light of the uncertainty surrounding their impact on the credit union industry and a need for further analysis.
With regard to the second proposal, NCUA seeks to amend the definition of “troubled condition” as that term appears in its regulations. Under the current definition, only a state regulator may declare a federally insured, state-chartered credit union to be in “troubled condition” based on a “4” or “5” composite CAMEL rating. The proposal would expand the definition to permit either NCUA or a state regulator to make such a declaration for a credit union. This clearly overreaches and usurps state regulatory authority, indicates a lack of confidence in our state regulators, and damages the dual-chartering system. NCUA should be working with state regulators on appropriate CAMEL rating determinations in order to prevent any rating discrepancies that may negatively affect the share insurance fund, rather than overriding the traditional and proper balance between state and federal regulation. MCUL’s comment letter strongly opposed this proposal.
Comments closed on the emergency liquidity proposal on Friday, Sept. 28, and on the “troubled condition” proposal on Monday, Oct. 1. For more detail, the comments letters issued by MCUL on both can be accessed on the MCUL website. As comments on these proposals wound up, the NCUA also issued several new proposals during its September meeting, on raising the small asset size threshold from $10 million to $30 million; modifying the definition of “rural district” for field of membership purposes; allowing federal credit unions to invest in TIPS; and improving regulation of pay-day lending alternatives. All four of these proposals are positive for the credit union industry, and we have already received more than a few comments on the SAS proposal. MCUL will issue comment letters on all four proposals by the deadline of Nov. 26, and encourages comments from Michigan’s credit union industry.
The comment periods for several critical proposals from the CFPB closed in October and early November. On Oct. 9, comments concluded on the nine-part mortgage servicing proposal, which encompasses rules on periodic billing statements; adjustable-rate mortgage (ARM) interest rate adjustment notices; prompt crediting of payments; prompt provision of payoff statements on request; force-placed insurance; error resolution and information requests; information management related to policies and procedures; and early intervention, customer contact, and loss mitigation procedures for defaulting borrowers. Comments also concluded for the CFPB proposal on appraisals and valuations on Oct. 15, and loan originator provisions on Oct. 16. Finally, comments closed for the proposal on combined TILA/RESPA disclosures and on high cost mortgage plans, both on Nov. 6.
As the law underlying most of the CFPB proposals, Dodd-Frank is self-effectuating – its concepts become effective on Jan. 21, 2013, even if no regulations are offered or approved. However, Dodd-Frank allows for delayed effective dates where rules are issued based on its provisions. MCUL and CUNA continue to advocate strongly with the CFPB for appropriate time to allow credit unions to prepare for implementation on these complex proposals that, so far, span nearly 3,000 pages of reading.
However, some of these proposals are not directly required by Dodd-Frank, and present possible conflicts or dual regulatory tracks when compared with state law. For example, within the proposal related to mortgage servicing, the proposed rules on early intervention and continuity of contact with delinquent borrowers, and provision of loss mitigation options where the servicer offers them, fall within this category. The rule provides for timelines on oral and written notice regarding the delinquency, the foreclosure process, and mitigation options. They also require designation of specific personnel that can assist the borrower, and development of policies and procedures by the institution with regard to borrower assistance throughout the foreclosure process.
In addition to not being directly required by Dodd-Frank, many of the proposed procedures and requirements on this topic are similar in scope and timeline to Michigan’s 90-day statutory framework for modifications and work-outs. This creates a potential concern over creation of conflicting regulations, which are not even necessary under the federal law. Further, legislation has been introduced in the state Senate that, as amended, will only carry the state 90-day law forward until June 30, 2013.
As another example, in the recent proposals related to high-cost mortgages, counseling, and integrated TILA/RESPA disclosures, CFPB proposed to revise the definition of “finance charge” and possibly create a new “transaction coverage rate” (TCR) concept. In its proposal, the CFPB acknowledges that these changes will have significant ripple effects across other regulations – the net impact of which could be that more closed-end loans will trigger Home Ownership Equity Protection Act (HOEPA) protections for “high-cost” loans, by affecting both the points and fees test and the annual percentage rate tests that determine whether a mortgage loan is high-cost. It would also cause more loans to trigger heightened escrow and appraisal requirements under Dodd-Frank, and could reduce the amount of loans that would otherwise fall under the “qualified mortgage” category of Dodd-Frank’s ability to repay provisions. MCUL opposed this revised definition in its comment letter, and further opposed the addition of the TCR calculation to determine the amount of financing needed for a mortgage loan. At a minimum, the new TCR would create confusion on the part of consumers, and place an unnecessary burden on creditors to calculate and explain it.
Credit unions and community banks were not the cause of the problems that spurred the creation of this law, and certainly don’t perpetuate them. MCUL will continue to advocate with the CFPB, as with the state Legislature, that the unique structure and mission of credit unions, and our close ties with our members and communities, should be taken into account as they craft these rules and that an exemption for community institutions that are working to protect our members and customers is justified.
MCUL’s Governmental Affairs team can provide inquiring credit unions with information on these proposed CFPB regulations, and assistance in interpreting them. And, as with commentary on NCUA and other agency rules, our comment calls and letters can be found on MCUL’s website.
With the proliferation of proposed rules from the CFPB, NCUA, and other agencies, it is no wonder that regulatory burden and compliance costs are of foremost concern to credit unions, and other financial institutions. While the CFPB only directly supervises large institutions over $10 billion in assets, its regulatory offerings will apply to all financial institutions and mortgage lenders. Large and community banks and bank holding companies, are facing the same concerns and in some cases, they will face additional hurdles. These include new standards for capital and liquidity requirements such as those under Basel III, prohibitive restrictions on proprietary trading under the Volcker Rule, planning requirements for extreme financial distress or failure, and a host of new rules on derivatives.
Dodd-Frank represents the most significant overhaul of governing law and regulation applicable to financial institutions in our lifetime. Many of these regulations and much of the shift in regulatory philosophy is aimed at the large banks, to correct their perceived failings that resulted in the current mortgage crisis. The banks are quick to claim that the regulatory burden they are facing far outweighs that placed on credit unions. To be fair, there are a large number of new regulations aimed at activity that is traditionally the province of the big banks, by which our members will not necessarily be adversely affected. However, the NCUA and our other regulatory agencies have not stopped writing new rules, and as in the case of the Basel III provisions, they are looking at some of these proposed bank rules with an eye toward possible application to credit unions.
Further, banks’ attempts to leverage the “unfair imbalance” of regulation under Dodd-Frank to justify denying credit unions access to fair and highly appropriate service opportunities for our members (like additional member business lending capacity) do not hold water. Within the market and the “space” that we share, credit unions are affected just as deeply and adversely as the banking community by the oncoming regulatory onslaught under Dodd-Frank – and in most cases, as a result of their malfeasance. It is critical that our lawmakers and regulators understand not only the differences between our institutions, but also the similarities in regulatory and compliance challenges that credit unions and banks face, when it comes to more global questions on the services credit unions provide or their tax exempt status.
MCUL and CUNA are working together to educate our state and federal lawmakers on the dangers of unchecked regulatory proliferation, which is rooted in ill-conceived and hastily constructed legislation like Dodd-Frank. Further, we continue to actively engage our regulators, in particular NCUA and the CFPB, advocating credit unions’ perspective on these measures and pushing for appropriate changes along with adequate time to prepare for their implementation. In partnership with our member credit unions, both groups actively seek balanced regulatory measures that recognize credit unions’ operational structure and unique needs, and will seek changes in the underlying law to remedy any inappropriate provisions that lead to potentially harmful rules.
Importantly, on behalf of Michigan’s credit union industry, MCUL continues to challenge increased regulation where no clear and compelling justification exists. MCUL continues to work to help credit unions weather the coming regulatory storm and to ensure that the emerging regulatory structure and compliance climate accounts for the role and the needs of smaller, community institutions and the members we strive to serve. As you can see, MCUL's advocacy efforts are intensely focused on regulatory relief – during the legislative process beforehand and when rulemaking begins after laws are enacted. Whether confronting new regulations like those mentioned in this report, or seeking legislative fixes to arbitrary, outdated, and unnecessary legal restrictions, our efforts will drive at reducing unnecessary costs so that credit unions can lend more and serve more. But the strength of the credit union movement is YOU. Your input and participation, and grassroots lobbying is critical to our efforts on the industry’s behalf. Ongoing, active involvement on pending regulatory and legislative issues should remain one of the most important strategic priorities for every credit union.
And finally, I remind our credit union community that for both MCUL and CUNA, we have a threefold strategy for assisting with regulatory compliance. In this report, I have talked mainly about the first strategy, that is advocacy. Information is the second important facet and we will continue to provide support here through our Infosight product, our team of support specialists and other information resources offered via the league and CUNA. The third strategy is implementation. Our fee-based consultants stand ready to assist credit unions of all sizes with compliance audits and tracking tools to help assure compliance.
Advocacy, information and implementation. These three strategies reflect our commitment to help member credit unions face the challenges of regulatory compliance.