Sen. Dodd's Prescription for Reg Reform Is a Mixed Blessing for CUs
WASHINGTON -- For credit unions, Senate Banking Committee Chairman Christopher Dodd's proposed regulatory overhaul is both the best of bills and the worst of bills.
On the plus side, most credit unions wouldn't have to worry about an additional examination, nonbanks would face more regulation and credit unions aren't perceived as a potential systemic risk.
On the down side, there would be an unknown entity making consumer rules that may not understand the uniqueness of credit unions and with that may come greater compliance costs. Also, federal laws wouldn't preempt most existing state laws.
Sen. Dodd (D-Conn.) unveiled the bill on March 15, with no co-sponsors on either side of the aisle, following extensive negotiations with Republican committee members. The panel is marking up the bill this week, and he has said he hopes to complete work by the time lawmakers leave for recess at the end of the week. The full Senate would then likely take it up in April or May, and if it passes a bill, it would have to be reconciled with the regulatory restructuring bill passed by the House last December.
The bill would create a Consumer Financial Protection Bureau housed in the Federal Reserve and headed by someone appointed by the president with the advice and consent of the Senate.
All credit unions would have to comply with the rules issued by the CFPB, but the NCUA would handle the enforcement for institutions that have assets of $10 billion or less. The three credit unions with assets of more than $10 billion-Navy FCU, Pentagon FCU and State Employees Credit Union-would be subject to consumer-related examinations by the CFPB, while the NCUA or a state regulator would handle the safety and soundness examinations.
CUNA and NAFCU said they plan to ask lawmakers to introduce an amendment raising the threshold to $50 billion, indexed for inflation. The House-passed bill also contains a $10 billion threshold, which was raised from $1.5 billion at the behest of credit union trade groups.
CUNA Vice President for Legislative Affairs Ryan Donovan said his group's arguments would stress that by their nature credit unions are focused on treating consumers well and "if our members don't protect consumers, then they will lose members."
NAFCU is emphasizing that two of three largest credit unions primarily serve the military and any additional compliance costs would be paid for by those defending the nation and their families.
Both groups said the new bureau would cause some credit unions to spend more on compliance. Neither offered up an overall cost estimate.
Under the bill, nonbank lenders, such as mortgage companies and payday lenders, would be subject to examinations by the CFPB. Currently, those entities are mostly regulated by states.
"That would lessen their competitive advantage over credit unions, and we see that as a net plus," Donovan said.
CUNA and NAFCU are at odds on the issue of federal preemption of state laws. Dodd's bill would allow states to enact stronger regulations than those of the federal government.
NAFCU is pushing for an amendment that would let the NCUA preempt any law that "prevents or significantly interferes" with the ability of a credit union to operate.
NAFCU Executive Vice President of Government Affairs Dan Berger said his group has found some interest among lawmakers for the amendment. Other groups with similar positions include the American Bankers Association and the Financial Services Roundtable, which represents large financial firms. They contend allowing different sets of consumer rules would make it hard for financial service providers that operate across state lines and would overturn 150 years of precedent.
On the flip side, Donovan said while his group is still reviewing the Dodd bill, it will work to ensure there is no preemption of state laws.
NCUA Director of Public and Congressional Affairs John McKechnie said his agency has "always used its preemption authority lightly, and we don't expect to be adversely affected by these proposed changes."
NASCUS, which has long been concerned about federal encroachment of state power, didn't comment on Dodd's proposal but has said throughout the legislative process that it will work to protect state autonomy and be certain that federal rules are a floor, rather than a ceiling.
The new consumer bureau's rules could be overturned by a two-thirds vote of the newly created Systemic Risk Council, made up of the heads of several key financial regulators, though not the NCUA.
At a news conference unveiling his bill, Dodd said in response to a question from Credit Union Times that the new regulator will be a "strong and independent consumer watchdog." And while he conceded that the bill "won't stop the next [financial] crisis from occurring," he predicted it will provide future generations with the tools needed to curb practices that have caused many problems to the financial system.
Sen. Bob Corker (R-Tenn.), the lead negotiator for the GOP on the issue, praised the bill for including many components supported by his party-including placing the consumer regulator inside the Fed rather than as an independent agency as proposed by President Obama. However, he said he's not pleased with the overall bill and would use the committee markup to try to get a bill that can get bipartisan support.
CUNA and NAFCU said they are pleased that Dodd's proposal wouldn't require credit unions to have to contribute to any fund aimed at rescuing for-profit companies deemed too big to fail. The bill also doesn't place executive compensation restrictions on not-for-profit financial institutions, such as credit unions.
Dodd's bill creates an Orderly Liquidation Fund, financed by mandated contributions from "eligible financial companies," which include large bank holding companies.
Under the House-passed bill, the Federal Reserve would handle the regulation and the FDIC would administer a fund aimed at rescuing troubled institutions. But lawmakers approved an amendment exempting financial institutions with assets of $50 billion or less-which includes all credit unions-from contributing to the fund.
While there will be much discussion of the merits of Dodd's legislation, political factors will play a significant role in whether the Senate passes a bill.
While some committee Republicans have praised parts of the bill, the relations between the parties have been especially tense recently, fueled in part by the Democrats' threats to circumvent normal Senate channels to pass health care legislation.
Corker told reporters that while there will be some bitterness among Republicans about the health care process, "I hope most members will consider this issue on its own merits."
NAFCU Director of Legislative Affairs Brad Thaler gave "better than 50-50 odds that the Senate will pass something," but Dodd still has a great deal of work to do to seal the deal.
Dodd will be walking a legislative tight rope. He needs to find ways to win over some Republicans while not alienating liberals in his own party.
Some Senate Democrats and Sen. Bernard Sanders (I-Vt.) have pushed forcefully for having the consumer financial regulator as an independent agency. While Sanders isn't on the Banking Committee, his vote will be up for grabs, especially if the final vote count is close.
This November's elections could motivate lawmakers to act.
"Nobody wants to face the voters having helped Wall Street without having taking steps to help Main Street," Thaler said.