By Matthew D. Urban, Attorney
Ever since the enactment of the Dodd-Frank Act and the creation of the Consumer Financial Protection Bureau (CFPB), compliance related issues have increasingly impacted credit unions’ day-to-day operations. Tasks that used to be handled internally by one or a small group of employees and management, now requires the hiring of additional staff, including but not limited to third party vendors. Not surprisingly, this additional devotion of time has also meant an additional allocation of resources. However, while this increase can easily be measured in terms of money allocated, what often gets overlooked is that these “costs” ultimately trickle down to the member whether it be through an increase in fees or a loss of services or products.
Recently, the CFPB indicated an interest in determining how much it costs financial institutions to comply with the regulations that are issued. Specifically in a March 20, 2013 blog post on its website (www.consumerfinance.gov), the CFPB indicated that their Research, Markets and Regulations team was going to study the costs of the rules that are issued as they “hope to become better and smarter regulators.” While this promise may seem laughable to those closely following the progress of the CFPB, perhaps their acknowledgement of the issue may offer a sliver of hope to credit unions that are already well aware of the costs the CFPB is pledging to look into. However, instead of waiting for a CFPB report to be issued, I solicited opinions and information from several CEO’s of credit unions of varying sizes in Pennsylvania in order to better understand the exact nature of the impacts of recent regulations.
Not surprisingly, all of the credit unions surveyed specifically mentioned the increase in employee costs as the main impact of the increased emphasis on compliance issues. While the larger credit unions typically have hired additional employees for newly created compliance positions, the smaller credit unions have not been able to absorb those costs, but rather, have relied on the cross-training of existing employees or otherwise re-assigning employees from one job within the credit union to a compliance position. No matter how they have gone about increasing their compliance staff, those CEO’s surveyed all indicated that in order to compensate for the rapid growth in their personnel costs, they have been looking for ways to generate new sources of revenue through an increase in existing member fees or the creation of new fees such as application fees where they may have not existed in past. While many of these fees may not be overwhelming to the membership at large, the inclusion of the new fees are serving to further create a competitive disadvantage between credit unions and other financial institutions such as banks that may be better situated to absorb those additional costs. However, it should be noted that not only does this disadvantage exist between credit unions and banks; it has also created similar disadvantages between small and large credit unions.
Perhaps the more subtle impact of growing compliance costs is the impact on services and products offered. Although each CEO questioned indicated they had no intention of eliminating any existing products, all acknowledged that member services such as courtesy pay have already or may have to be eliminated. Additionally, the CFPB’s new one-size-fits-all regulations governing mortgages have led CEO’s, particularly those at smaller credit unions, to re-consider whether or not they will be able to offer affordable and competitive mortgage products to their membership due to issues such as SAFE Act certification for staff and new requirements for the establishment and maintenance of escrow accounts. However, most troubling was the suggestion by the CEO’s queried that while they are hopeful that they will not have to eliminate any products, any credit union that is not already offering a product to it’s members may not be able to financially justify the risk and exposure required to add anything new, such as mortgage and home equity loans, that in the past helped to increase income but also attract new members which in turn have helped sustain and even grow many small and mid size credit unions.
As member owned financial institutions, credit unions have always held a unique position within our financial system. Being member owned, the focus has naturally always been on serving the diverse financial needs of their members and by tailoring their products and services to a specific membership base which represents all levels of the economic ladder. While direct and measureable impacts of new regulations include an increase in employee costs, elimination or reduction in services, increase in fees, elimination of products or an unwillingness to offer new products, there are many indirect impacts that credit unions and the economy at large will experience that will never show up in a CFPB study on the issue. Ultimately, the pathway to a modern economy and economic freedom is the availability of credit. Unfortunately, as credit unions endure the current compliance environment and the associated costs, those members at the lower end of the credit market will be made to suffer as their local credit union, which they have always relied upon for credit, may not have the resources necessary to be there to offer that credit in the future.