By Matthew D. Urban, Esq.
As the 2012 presidential campaign heats up, so does the partisan rhetoric between political parties. Beyond the rhetoric however, the fallout from the Dodd-Frank Act continues to ripple through the financial sector. The agency tasked with implementing Dodd-Frank is the Consumer Financial Protection Bureau (CFPB). Since the CFPB is tasked with overseeing financial institutions with assets over ten billion dollars in assets, almost all credit unions will not come under its enforcement jurisdiction. Despite not being directly regulated by the CFPB, credit unions are subject to the regulations it enacts and as a quick search of the CFPB’s website reflects they have been given broad authority to regulate the financial sector, as well as those directly and indirectly involved. Since many credit unions may not yet realize the impact that the actions of the CFPB will ultimately have over their day-to-day operations, they may also fail to realize that the growing political polarization in America, which ultimately led to its creation, is also allowing it to continue to grow in size and influence, much of which is unchecked by any branch of government.
Of course, an excellent example of where credit unions are losing out in today’s current environment is in the regulation of the mortgage loan market. One of the main focuses of the CFPB has been to establish and define what is or is not deemed to be a quality mortgage. While the final rules continue to be ironed out, the message has been sent that financial institutions must carefully establish, document and report the standards being used in their lending practices while continuing to ensure that those lending practices do not discriminate against any group. However, it appears that the ultimate goal is to regulate the risk out of risk based lending.
While this appears to be a laudable goal, attempting to eliminate the risk from lending is not based in economic reality. That aside, most credit unions simply do not have the resources to comply with the onerous regulation being enacted by the CFPB and enforced by their NCUA regulators. Instead of completing their mission of serving their membership, credit unions must devote untold time and resources towards complying with one-size-fit-all regulations that do not account for the unique place credit unions hold in the financial sector. A fitting example of the increased regulatory burden within the mortgage market being placed on credit unions can be seen in the NCUA’s reporting requirements of first and second mortgages.
Specifically, in the NCUA’s Second Quarter Call Report (Call Report), credit unions are being required to report loans, including home equity lines of credit that are secured by a first lien as first mortgages for interest rate risk purposes on form 5300. While the requirements on its face may not seem particularly onerous, credit unions are now being instructed by their examiners that in order to comply with the requirements of the current Call Report that they must also report loans initially having second lien position which subsequently assume first lien position as a first mortgage on form 5300. Setting aside the fact that a loan with second lien position subsequently assuming first lien position is one of the least risky types of loans a credit union can have in its loan portfolio, the position being taken by the NCUA and the examiners in enforcing this reporting requirement borders on the absurd. The practical application however, is that credit unions will have to endure additional and unnecessary costs in terms of both time and money to comply with this requirement.
Credit unions have always had to endure the results of political battles in Washington. Unfortunately, the political climate in America continues to become increasingly polarized which has led to rules and regulations not necessarily based in economic reality, but rather that are developed to score political points. As a result, credit unions are having to devote more time and resources to comply with an ever-growing regulatory burden in lieu of focusing on providing services to its members. Unfortunately, the current political polarization is likely to continue even after the election in November. As such, it is up to the credit unions, its members and the supporters of the movement to ensure that the politics of the day do not continue to further impact the ability of credit unions to serve their current members and to attract new ones.