IBJ: Are credit unions subject to the Dodd-Frank Act?
Nussle: Yes, we are. We’ve been regulated since 1934 and we have an excellent business model and an excellent track record of managing people’s finances and being pro-consumer. When Congress was passing Dodd-Frank they provided an exemption authority because they understood one size doesn’t fit all. But, by the same token, they were hurrying to pass a law to deal with the financial crisis and, frankly, to look like they were doing something. So, Congress passed this one-size-fits-all bill that gave exemption authority to the Consumer Financial Protection Bureau. We figured the CFPB was going to understand that the problem was about big banks and systemic disruption and the way they treat consumers and too big to fail and everything else and use the discretion Dodd-Frank gave them. In reality what the CFPB has done is it has lumped everything including credit unions into this when we were not part of the problem when the financial system almost collapsed in 2008. Congress assumed that credit unions would be exempted by the CFPB but they have not been and they have no rationale for not exempting us. Because we’re nonprofit, credit unions return our earnings to our members in the form of lower interest rates on borrowing or higher interest rates on savings.
IBJ: What is the cost of regulatory compliance?
Nussle: Compliance costs have added about $223 million to the costs of Illinois credit unions which figures out to about $76 dollars per person.
Meyer: It’s $76 per member and we have 61,000 members. Do the math. That’s $4.6 million. For the sake of conversation, let’s say we agree that 75 percent of the regulation is needed. If 25 percent of it doesn’t protect or benefit members, there is $1 million we would save. In credit unions that money goes back to the members. That million dollars could be invested in more technology or to deliver services more conveniently or it could be used lower loan rates or pay higher interest rates on deposits. That’s how my members are impacted by the additional regulatory burden.
IBJ: I would think that there is an economy of scale — the smaller you are, the more burdensome compliance is. Is that accurate?
Nussle: It is. NUCA represents about 6,000 credit unions. About 5,000 of them are below a hundred million dollars in assets. The economies of scale definitely affect the smaller community banks and credit unions far differently than they do the bigger banks. In fact, I would even argue that larger financial institutions, while they will always complain about regulations, see regulations as a way to weed out the competition. So, a big bank can hire law firms and have their own in house legal departments and compliance departments deal with this. The larger banks are gobbling up market share from the smaller institutions who can’t keep up with the regulatory requirements.
Kane: Regulators define a small credit union as one with less than $100 million in assets. Eighty-three percent of our credit unions in Illinois are under $100 million and more than 45 percent have less than $10 million in assets. I’m talking about credit unions with four or five employees and 20 percent of them have one or fewer employees – we still have all-volunteer credit unions in Illinois. But, they’re subject to the same rules and regulations as Chase or Wells Fargo with literally thousands of compliance staff.
Most small–to-medium sized credit unions don’t have dedicated compliance staff. Typically, the job falls on the lending manager or even the president. And the rules are complex. For example, the small dollar lending rule proposed by the CFPB is more than 1,300 pages long. The smaller credit unions response to this rule is that they may not be able to continue to offer small-dollar loans anymore because they are concerned with complying with this very complex regulation and how it works with existing state regulations. Credit unions will start pulling back some of their offerings. We’ve seen that throughout the state on other products where the regulations have made it too hard for credit unions to understand and comply with new rules intended to help consumers.
Nussle: We estimate, based on very recent surveys, that four out of ten credit unions that were previously providing mortgages have left that line of business. They just stopped doing mortgages because they just can’t keep up with the cost of doing them and the systems that are required in order to manage compliance.
Kane: The four largest banks, Chase, Wells Fargo, Bank of America and Citi, each of them individually is bigger than the entire credit union industry. Chase is over $2 trillion in assets and all of the credit unions put together have $1.2 trillion in assets. So, just Chase alone is almost double the size of the entire credit union industry. CFBP is not thinking of credit unions when proposing new rules; they’re thinking of the largest players – the ones that caused the financial meltdown — and they’re enacting rules for those big banks. To them, more laws and rules are simply another expense to deal with, while smaller banks and credit unions are being overwhelmed with all the new regulations.
IBJ: The regulatory burden has played a part in the consolidation of community banks. Is it also true with credit unions?
Kane: Absolutely. Over the last 25 years the number of banks and the number of credit unions has been going down almost in lockstep. At the end of 2014 there were 307 credit unions in Illinois and now we have 280 so we lost 27 in the last two and a half years. We’ve been losing about 16 to 17 annually in Illinois over the last 10 years and nationwide it’s nearly one every business day.
Meyer: I’ve been here at 1st MidAmerica Credit Union for 15 years. I think the number of credit unions has almost been cut in half in the years I’ve been here. It’s not all related to regulatory environment but that’s a piece of it.
IBJ: Is there anything going on in regard to changing the regulations for credit unions?
Nussle: Yes. We at the Credit Union National Association have been working with Congress to try to reform Dodd-Frank. In fact, we had 5,000 advocates from credit unions from all 50 states come to Washington in February to advocate for changing Dodd-Frank. We had a big victory last month when the House of Representatives passed what’s called The Choice Act. The Choice Act was the House version to reform Dodd-Frank to make sure that it recognizes that one size does not fit all for financial institutions. It goes to the Senate next. That’s going to be a more difficult process given the Senate rules and the margin between the parties but we are continuing to push that reform effort forward.
Kane: We’re hopeful that the Choice Act passed in the House and the Senate version of the bill can address our issues. We’re not advocating for the complete abolition of the CFPB but one of the key things we’re looking is giving the president the ability to remove the head of the CFPB. It is the only agency with a single, unaccountable administrator. They get their money without congressional appropriation because they are allocated a percentage of the Federal Reserve’s budget every year, which we would like to change to give Congress control over the CFPB’s funding.
Nussle: There are some positives to Dodd-Frank. We’re not saying to get rid of it. We just think that the law was not perfect when it was passed and should always be open for reform and revision as the market and experience dictate. We call our campaign, The Campaign for Common Sense Regulation. We believe there should be standards and regulations regarding financial services when people’s money is involved. It’s good to have a referee in there saying, hey there is a right way to do things and there is a wrong way to do things and protecting people. But, when you have a proven track record and when your model is based around protecting the consumer first and foremost like credit unions are, then there should be a chance to have an off ramp to let those good actors continue to do what they do.
So, that’s why we believe that the CFBP should not be a one-person, almost dictatorship which is unusual in the federal government. There are very few examples of where one person is in charge of everything and he is not responsive to Congress or even for that matter to the president. We want a commission of five people to make those decisions and we also believe that they should be under the appropriations process. Their funding comes from the taxpayers and it should be reviewable. And then last but not least, we want the CFPB to exercise its exemption authority when they see a financial institution that’s doing a good job. Don’t force them to have to comply with these one-size-fits-all regulations. Exempt them. Those are the three big things that we’re pushing on as we move to the Senate and see if we can keep the momentum going for reform.
IBJ: Is anyone fighting against you?
Kane: There are those who believe that the CFPB is doing exactly what it was designed to do and creating exceptions for small financial institutions is a slippery slope. They don’t want financial institutions treated differently because of size, business model, location or, for that matter, their track record. We want credit unions to be viewed differently because we’ve proven over almost a hundred years a safety and soundness record that’s really second to none. As a member-owned organization, credit unions have also been the consumer advocate before anyone ever heard the term consumer protection.
IBJ: Are community banks on your side in this reform effort?
Nussle: We would be right there shoulder to shoulder with our community bank friends to say that the rules that were really targeting the largest banks should include exemptions for community banks and credit unions. The Choice Act that passed the House is going to face a significantly bumpier road in the Senate. Some of the senators are very hesitant to open Dodd-Frank up for reform because they see it as a slippery slope where they’ll be besieged by interest groups and other sized banks requesting exemptions and all that.
Meyer: If you look at the whole financial services industry on a national perspective, credit union’s part of the market is 7 percent. What they define as community banks make up about 18 percent. Between smaller banks and credit unions, we make up just 25 percent of the industry. But regulators look at us through the same glasses and there needs to be a separation for us from how they look at the Wells Fargos of the world.