Compliance Burdens Weigh on Small Credit Unions
WASHINGTON – Handling overregulation is right up there on many credit unions’ top concern lists alongside attracting younger members and competing with large payment companies – and it was a hot discussion topic at this month's America's Credit Union Conference and World Credit Union Conference in Denver.
“We’re just overregulated…something fierce, in my opinion,” Mike Williams, president/CEO of the $131 million Colorado Credit Union in Littleton, Colo., said at the conference.
According to NAFCU, complying with new regulations that have emerged in the last five years has reduced the industry by 17%. NAFCU sent a letter to the chairman and ranking members of the Committee on Banking, Housing and Urban Affairs Senators Richard Shelby (R-Ala.) and Sherrod Brown (D-Ohio) this month to address its concerns.
NAFCU said many of its concerns stemming from credit unions being under the CFPB's regulatory control have proven to be legitimate.
With the five-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act taking place last week, Washington legislators are showing increased support for credit unions as well as for undoing some of the laws that many believe have been strangling smaller institutions to their breaking point.
“The way it is now, they [regulators] force the heavy hand on credit unions and banks and so forth,” said Rep. Roger Williams (R-Texas). “I’m a small businessman, I take it personally. I rely on credit unions and I rely on banks and it's harder for me because they have so much compliance and regulations they’re fighting that they can't do business.”
Rep. Williams drafted a bill that would require the CFPB to explain why it will not exempt credit unions from some of its rules, which it's currently allowed to do. The CFPB has the ability to exempt smaller financial institutions from rules and regulations intended for larger banks, but to this day the agency has often failed to use this exemption, he said in a statement. H.R. 3048, The Community Financial Institution Exemption Act, was introduced to the House Financial Services Committee earlier this month.
“So we wrote this thing to turn it around on the CFPB and say, ‘Look, if you think the smaller credit unions need to meet certain requirements, then you need to show them why,’” Rep. Williams said. “Banks and credit unions have gotten along just fine before Dodd-Frank. I’m a capitalist and I believe in less government, I’m not a socialist. That's what Americans have to decide – which course are we going down now? Big government or less government?”
According to CUNA, since the beginning of the financial crisis, credit unions have been subjected to more than 190 regulatory changes from nearly three dozen federal agencies, totaling nearly 6,000 Federal Register pages.
NAFCU is also hoping to work with the CFPB to change its leadership structure from a single director to a five-member board appointed by the President.
Rep. John Ratcliffe (R-Texas) created a bill to eliminate the CFPB altogether. It has not yet made it to the House floor.
Rep. Maxine Waters (D-Calif.) stated her support for financial regulations during a House Financial Services hearing earlier this month. She blamed unchecked financial institutions for the loss of four million jobs and trillions of dollars of Americans’ savings. She even went as far as blaming financial institutions for hurting children because parents divorced during the recession or moved more frequently due to job losses. She called Dodd-Frank “settled law” and said it was time to move on.
Kevin Foster-Keddie agreed with Waters that Dodd-Frank, and by extension the CFPB, is settled law. Foster-Keddie is the vice chairman of the Credit Union Advisory Council to the CFPB, CEO of the $2.3 billion Washington State Employees Credit Union in Olympia, Wash. and chairman of Q-Cash Financial. Q-Cash Financial offers credit unions an automated lending platform for quick, short-term loans, allowing them to compete with payday lenders.
“The CFPB is here, they’re here to stay,” Foster-Keddie said. “There are people who love the CFPB and they love the role that they’ve played. They believe that they’re protecting consumers and don't want anything to change with that. And then there's the other side that says, ‘We need to roll that back. The compliance costs are onerous; credit unions can't really compete. It's disadvantaging small players.’”
Foster-Keddie said that while the CFPB likely feels there are credit unions that have committed acts as egregious as some payday lenders have, it has been proven in nearly every industry that over time, too much regulation will hurt small companies.
“I think there's no question that more regulation advantages large players and disadvantages small players,” he said. “Small players cannot bear the cost of the regulations.”
In 2011, entrepreneur and business owner Michael Sinensky wrote a bipartisan piece that appeared in Business Insider examining how overregulation of small businesses hurts employees the most. He contended that regulations are meant to protect the masses, but actually hurt the people they set out to protect.
Sinensky went on to say that he can no longer offer employees shifts totaling 50 to 60 hours a week, or the ability to work a double shift – a popular option for those in the restaurant industry, he said, because it is the most profitable for employees – because he cannot afford the new overtime payments that were mandated a few years ago. Also, since he can no longer offer two health insurance packages to his employees due to the Affordable Care Act, he put all of his employees on one he could afford; as a result, they ended up with a less attractive health insurance policy.
“In my industry, regulations have caused me to adjust the way I operate to cause overall more harm to my employees then the owners/employers,” he wrote. “If you regulate more and continue to increase the costs of doing business, you will force me into a corner and I will either lay my king down or be forced to hurt those you aim to protect by cutting salaries, hours they need to survive and offering less perks.”
Nina Myers, vice president of operations for the $170 million Fitzsimons Credit Union in Aurora, Colo., said what makes it especially difficult for credit unions is that competitors are not regulated equally.
“A lot of these other competitors that are outside the banking space, don't have the regulators,” Myers said. “You know, PayPal is a big disruptor, but it's technically not a bank so they don't have to deal with regulations.”
Foster-Keddie said with more Americans asking for financial regulation and the reigning in of big banks, small credit unions are going to continue to feel the affect as well.
“My opinion is, and I’m not a political operator, my opinion is I don't think the legislation will go that far,” he said. “We know what the political environment is in Congress. Whether it does or does not, does not affect our business and how we approach our business model [at Q-Cash Financial].”
Instead, he said, it's time for credit unions to work around the regulations and find other ways to cut costs, and not worry about whether the CFPB is right or wrong politically.
“We have to try and understand what their concerns are and what they’re trying to accomplish,” he said.
Q-Cash Financial's interest rates are under 36%, which keeps it from being regulated by the CFPB and allows it to give members longer loan terms at a cheaper rate. WSECU operates a separate subsidiary through which four credit unions partner to share compliance costs.
“You have to make business decisions to try and react to [the new regulations,]” Foster-Keddie said. “It's not going to go away. It's not just the CFPB, it's across the landscape of the financial services industry and most industries. That is a public policy decision that we as a country have made. The outcome of that is that you have more larger firms and fewer smaller firms.”