Regulatory Agenda May Complicate Operational Priorities
Fundamental issues of capital and risk will need to be part of credit unions’ strategic planning this year as regulators contemplate action on risk-based capital and potential rules on interest-rate risk.
“Credit unions need to thoroughly understand these regulations, and what they need to do,” Mary Dunn, SVP and deputy general counsel at CUNA, said.
While the new risk-based capital proposal from NCUA will have much less impact than its initial proposal, credit unions need to assess the need for corrective action and plan for whatever would be required if they need additional capital.
“This could mean they can do less in terms of products offered and [it] could affect their plans for growth,” Dunn said.
A rule on interest-rate risk, which CUNA opposes, would require credit unions to examine the risk mitigation rules they have in place and place additional focus on their asset-liability management, according to Dunn.
These longer-term issues will be part of strategic planning this year along with a range of shorter-term issues from gearing up for final implementation of new mortgage disclosure rules to the long-awaited action on possible overdraft/NSF restrictions, CUNA officials said. The good news is that planning may include some regulatory relief this year as a Republican majority in both houses.
“There will be a number of opportunities on both sides of the Capitol,” Sam Whitfield, vice president, legislative affairs at CUNA, said.
For instance, credit unions will be seeking parity with banks on the requirement to maintain 10% of their assets in residential mortgage loans for Federal Home Loan Bank membership, which banks with less than $1 billion in assets do not have to adhere to.
Whitfield is also hopeful that there will be progress on the examination fairness legislation proposed in the last Congress to address complaints about the examination process.
Risk-based capital and interest-rate risk rules also top the agenda items for Carrie Hunt, general counsel at NAFCU. She complimented members on working to get improvements in the revised proposal, but added in a video summing up advocacy efforts for 2015, “We certainly don't think our work on risk-based capital is done.
For Hunt, the long-discussed rule from the CFPB on overdrafts remains a top concern for credit union planners. Issues that may be included in any eventual rule are questions of transaction re-ordering that results in higher fees, disclosure requirements, and limits on transactions. These issues, plus the question of opt-in or opt-out requirements, remain central, Dunn agreed.
“The real issue is whether or not CFPB clearly treats overdrafts as a loan,” she said. “This would put credit unions in a difficult position.”
Treating the overdrafts as loans would trigger of number of disclosure, compliance and even usury considerations, she said. Lobbying efforts will continue to aim at minimizing the requirements of the rule so that it will not undermine credit unions’ ability to offer the product.
In the meantime, for planning purposes, credit unions relying heavily on overdraft/NSF fees should consider diversifying their product offering, according to some experts.
“When a top revenue source comes under scrutiny,” Dunn said, “prudent management would be sure to look at a number of other ways to sustain capital requirements and growth.”
While the overdraft proposal may not be ready until late this year or early 2016, CUNA officials suggested that credit unions might want to look at the CFPB's white papers on the subject to see what they are thinking on these issues.
New products that have proven attractive to members and generated added fee revenue include mobile banking services, ID theft protection, and peer-to-peer lending. Meanwhile, potential CFPB action on prepaid cards could pose a threat to another credit union product. The agency is considering whether some of the protections provided to credit cards should be extended to prepaid cards.
“Credit unions would have to evaluate how much extending these protections could interfere with profit,” Jared Ihrig, a senior director of advocacy and counsel at CUNA, said. “They would have to decide about continuing or discontinuing their product offerings.”
The most immediate planning challenge for credit unions, Ihrig said, is getting ready for full implementation of the integrated mortgage disclosure in August.
“This will take up a lot of resources and training,” he said, “and working with vendors to get it right.”
Complicating matters is that there is no early adoption, Ihrig said. “You can't put things into action until August,” he said.
On the plus side, expanding the definition of small creditors and rural lenders for somewhat looser restrictions on ability to repay requirements and qualified mortgages could be finalized this year.
In January, the CFPB issued a final rule with tweaks to the integrated disclosure rule that fixes some of the more challenging aspects, such as a tight deadline for revised loan estimates.
While the Republican majority in Congress is serious about exploring proposals for tax reform, lobbyists see little immediate danger of credit unions losing their tax-exempt status.
“I think now everyone in Congress is aware of how important that is to credit unions,” Whitfield said.
But advocates are not letting down their guard. “Credit unions definitely don't need to plan on losing the tax exemption,” Whitfield said, “but we are planning a full-throated defense of it.”
Other issues that credit unions might consider in their strategic planning this year include a long-pending rule from the Financial Accounting Standards Board on the reporting of credit losses. This rule, which has been pending for more than 18 months, may be finalized in the late spring or summer, Dunn said.
“Credit unions may initially have to put more in their allowance account,” she said in response to the rule.
Regulator attention to cybersecurity could also impact credit unions.
“They may have to beef up what they’re doing in that regard,” Dunn said.
Hunt also called attention to the Department of Defense's proposal to extend the protections of the 2007 Military Lending act to virtually all forms of credit, including credit cards and car loans. She pointed out that it would impact not just those credit unions specifically serving the military, but any credit union that has a service member or spouse among its membership.
“The credit union is going to have check proactively to see whether they are a service member, and this, of course, will be an additional regulatory burden for credit unions,” Hunt said.
In the plus column, opening up a possible new product for credit unions was the enactment in December of the Credit Union Share Insurance Fund Parity Act that provides the full insurance coverage for Insurance on Lawyers Trust Accounts that the FDIC provides for those accounts in banks.
Credit unions had been at a competitive disadvantage because deposit insurance did not cover clients of the lawyer that were not members of the credit union – a gap that has now been remedied by the new law.