The Dodd-Frank Wall Street Reform and Consumer Protection Act: Creating an Action Plan for Your Credit Union

By: Rob Rutkowski, Esquire

I recently gave a presentation on “Preventing Credit Union Failure Given the Passage of Regulatory Reform” for NAFCU and will be presenting material to other credit unions on the new Consumer Financial Protection Bureau (CFPB) in the coming months. At the end of the day, I think that this new Act boils down to two things that credit unions must work harder on: cost-cutting and innovation. My thoughts:
Cost Cutting

Traditionally, a credit union doesn’t run as lean as possible, that is, just short of the point of employee discomfort. With member service being such an important focus, sometimes this means having more than enough tellers and loan officers to handle member needs. Unfortunately, as compliance costs increase, credit unions will be forced by the market to run as lean as possible, merge with other credit unions or cease to exist.  Therefore, it makes sense to have a contingency plan concerning layoffs. A credit union can do a reduction in force and create a plan whereby it reduces its labor force to the minimum possible number of employees to operate as a business. Moreover, there are ways that the credit union can pick up some of the lost labor resources via outsourcing and through volunteers. 

This will take planning. Credit unions are already great at forming CUSO’s to provide anything from accounting services, to back office services, to BSA compliance, to data processing. Some credit unions even outsource aspects of lending with 24-hour loan application and review services. There is room for more. If a credit union’s very existence is threatened, it can start eliminating all types of overhead including brick and mortar. If a credit union can move from a brick and mortar model to an Internet or virtual model, the cost savings can be significant– perhaps enough to save a credit union’s existence.  An Internet-based credit union can take in checks via remote capture and distribute funds via ATMs and checks. It can also have a bill pay system via ACH to move money around as well.  There are already examples of this in the marketplace. REALTORS Federal Credit Union is a virtual credit union and there are also quite a few virtual banks. The point is that if the credit union cannot do business because of the increased costs of compliance then everything needs to be on the table. 

Can this affect morale? Certainly. However, if the question is finding funds to handle compliance burdens, then tough choices may need to be made. If a credit union needs to free up funds but is not in a make-it-or-break-it situation, some of these concepts can be integrated without turning into an Internet credit union. 

Another more traditional resource is utilizing volunteers. When I was a director at a credit union, we had a supervisory committee that functioned as the credit union’s auditing entity. In other words, volunteers spent their time auditing the financial records of the credit union. This is entirely permissible under NCUA Regulations (assuming qualified people are involved).  Historically, credit union volunteers have taken on very tough jobs for no remuneration. This sort of resource drive can be undertaken by a credit union especially if it is do or die. It may take some persuasion, but there are vast resources in terms of cognitive surplus in any given credit union’s membership. Certainly, with the media’s focus on the graying of America and the large number of retirees from the baby boomer demographic, this cognitive surplus is both more talented and more productive than ever before. In terms of motivating people to volunteer, there need not be financial rewards involved. The Tom Sawyer effect from Mark Twain’s novel has been discussed in many popular business books. The idea is that someone can be motivated by recognition and by glamorizing the task in question. This doesn’t have to be a false whitewashing; simply disclosing how important the particular task is to the perpetuation of the credit union is sometimes all it takes to encourage volunteers. For example, let’s take BSA testing. A credit union must test its BSA policies and procedures by law. Volunteers can be mobilized to conduct this testing at the credit union and in every aspect of the BSA process at little cost. Volunteers can play a role in every part of the credit union’s functions. There have been credit unions that have used volunteers for tellers and loan officers and even CEOs. I’ll grant you that these were small credit unions at the time but it just depends on whether the person has the interest and motivation and is qualified and bondable. 

Other resources available to credit unions include collaborative Internet-based efforts. These include compliance collectives like the cob web list serve and cob web forum, FTP sites that are associated with the Credit Union National Association. Moreover, NAFCU’s Compliance Blog is the industry leader among compliance-oriented credit union blogs and provides free compliance information and a place to discuss compliance issues in the comments. More can be done. Internet forums can be setup to provide compliance information among credit unions free of charge. Credit union compliance officers know what applies and what doesn’t and that expertise can be shared on a nationwide basis. Another thing that can be done in terms of drilling down on each particular compliance obligation is assessing the risked-based aspect of the statute.  Many of the large compliance burdens such as BSA and FACTA have risked-based components to them. Identifying the minimal level of compliance is important in allocating resources to meet the compliance burden.

Finally, ultimately, the regulator is not the enemy. Open communication with the regulator in the compliance field is helpful. If we don’t communicate with the regulator, the regulator will not understand what challenges the credit union faces. Don’t get me wrong, this will be tough. Regulators are notoriously slow in understanding how credit unions make money. The costs of the compliance burden versus the actual value of the consumer protections provided are seldom compared by regulators. It is up to the credit unions to speak out loudly or at least identify issues that appear and take them to the regulators directly and via the trade associations. 


The credit union movement has a long history of using a model that works. Formed during the Great Depression, arguably the credit union model hits its stride in environments such as the one we are living in today. However, during the Depression, credit unions could help members without dealing with the onerous regulations that they now face. There were actually some different regulations then that we don’t have now, but certainly nothing like the Bank Secrecy Act or RESPA or Regulation Z existed in the 1930’s. One thing that credit unions need to keep in mind is that problem solving leads to innovation. If we have large looming issues in the compliance arena that seem insurmountable, then brainstorming over the specific problems can lead to innovative solutions. Credit union think tanks already exist, I3 comes to mind. However, these think tanks and other great minds in the credit union movement cannot be utilized if the people experiencing the issues don’t talk about them. In other words, when credit unions encounter significant compliance problems or changes, they need to survey the industry. They need to talk to each other and talk to consultants, talk to experts and even regulators so that all these minds are thinking about the specific problems at hand.

You know we have in the red flag regulation, this Appendix J from the government that describes all of these red flag examples from the complicated to the mundane. What we need, though, is an Appendix J of opportunity. We need a list of all of the credit union opportunities to review on a case-by-case basis. We need a checklist of escape paths and innovative revenue creating ideas that fit in the credit union model. A lot of these ideas exist but they are not widely disseminated. We need a list of all the products from indirect lending to shared branching to the types of CUSOs available, to student loans, to trade association preferred partners and on the flip side, credit unions need to be open-minded about trying new methods of generating revenue.  The only way to beat a dramatically increasing compliance burden is to run faster than the regulators. Credit unions need to cut costs brutally while at the same time exploring any and all opportunities for growth and revenue that fit in the particular credit union’s business model.  With the advent of the CFPB, the wolf is at the door. Either pursue cost cutting, compliance management, innovation and growth or explore merger partners, conservatorship or liquidation.


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