The pace of regulatory change in the credit union movement today is unprecedented, creating a crushing compliance burden. Fortunately, core processors are helping to lighten the load.
“A few years ago, regulation moved slowly, and for most credit unions compliance was an important, but not dominant, issue,” says Tammy Campbell, senior compliance counsel at Harland Financial Solutions. “Today, there’s no comparison regarding the volume and pace of change.”
Twelve hundred miles to Campbell’s north, John Murphy is thinking in the same vein.
“Credit unions were collateral damage from the financial crisis. After the economic crisis of 2007 and 2008, everyone wanted to throw something at the problem, and we continue to see proposals being introduced five years later,” says Murphy, president/CEO of the Maine Credit Union League and its subsidiary, Synergent.
“Despite all of the challenges credit unions face, including lending and the economy, compliance is still one of the biggest issues,” he says. “There are many regulations that can impede credit unions’ ability to work and serve their members. The challenge of compliance has forced them to commit many dollars and resources that would be better spent on serving members.”
Money and staff time devoted to compliance are up markedly over the past two years, adds Ben Jordan, Synergent’s assistant vice president. “This is a big deal for credit unions: Some of their best minds and talents are moving from core business into compliance.”
Murphy says the burden of compliance is a significant issue nationally because of the problems it creates in the marketplace.
“One example was the new legislation covering overdraft privilege, a service that members sign up for voluntarily. Legislation designed to diminish its presence in the marketplace has had the opposite effect: As more people learn about the service due to mandated disclosures, more of them have signed up.”
So where on the compliance front should credit unions focus their attention and efforts?
Sai Huda, vice president/general manager of enterprise governance, risk, and compliance solutions at FIS, cites three top issues examiners are focusing on:
1. Maintaining solvency and liquidity. Are credit unions adequately capitalized? Can they weather a crisis?
“Examiners look at a credit union’s overall risk management program,” Huda says. “Does the board understand the risks? Does it have a plan in place and is it managing that plan well? Is a credit union trying to grow in areas where it has no real expertise? This focus is driven by the Office of the Inspector General, which is filtering down to NCUA and other examining bodies.”
2. Fair lending. This is driven largely by the creation of the Consumer Financial Protection Bureau (CFPB), Huda says, citing mobile home lending as an example.
“Say a lender won’t make loans on homes with less than 600 square feet in size—typically mobile homes—because it doesn’t think these homes could be easily sold,” he says. “This policy might adversely affect elderly borrowers—age discrimination—many of whom own mobile homes with less than 600 square feet.”
3. Unfair, deceptive, or abusive acts or practices. Huda says examiners are looking harder at marketing practices, products, services, fees, and policies—any behavior that might be unfair to consumers.
“This isn’t just about bait and switch or lying—which credit unions simply don’t do—but inadvertent acts such as charging late fees and not giving members enough time to pay them, and then tacking on an additional late fee. That’s known as ‘pyramiding,’ ” he says. “Or it might be failing to post members’ electronic payments in a timely fashion, or being overly aggressively on collecting on late payments.”
Even if credit unions address these issues, Campbell says their biggest challenge is facing a state of uncertainty. She cites uncertainties raised by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the creation of the CFPB, which “has everybody waiting for implementing regulations.”
How vendors help
These compliance hurdles haven’t rendered credit unions helpless. Core processing vendors spend a lot of time and money preparing to move swiftly once government bureaucracies make up their minds and issue final regulations.
Harland Financial Solutions, for example, offers credit unions access to its internal staff of compliance experts and a nationwide network of legal counsel.
“We’re staffed to stay a step ahead of regulatory changes,” Campbell says, “and we’re already staging for anticipated changes, even given the uncertainty that comes with waiting for final rules.”
Huda says FIS provides a variety of consulting services, risk management software, compliance monitoring, and education. This includes “tailored presentations where we educate boards by coming in with a thorough risk assessment and discussing what they know and what they need to know.”
Generally, there are two types of credit union clients, Huda says: Proactive credit unions that want to be well-prepared for their next examinations and those that have been surprised by a bad exam or are uncertain how to proceed.
“Most of the latter credit unions believe they have a simple business model without much risk,” he says. “But market conditions can change—loan opportunities dry up or members lose their jobs—and the element of risk increases dramatically. Being small doesn’t mean low-risk. A small credit union can be in a volatile economic area and face major risks as a result.”
Jordan says Synergent works with CUNA Mutual Group on disclosures and documentation, which have to be accurate, legal, and perfectly written. Simply keeping
track of legislation and its impact on operations is a significant challenge for credit unions.
“Credit unions have tons of information,” he says, “but what they need is guidance and assistance to know what to do with it.”
What CUs can do
Campbell advises credit unions to stay informed and watch out for implementing regulations as they’re issued.
“I realize that’s easier said than done,” she says. “The best thing for credit unions to do is to look at the big picture and try to understand potential impacts. Being informed and thinking about compliance changes in advance—and not waiting until the last minute to understand what’s going on—removes a lot of anxiety.”
Campbell says there’s little hope the flurry of regulatory compliance will ease anytime soon. “The outcome in the November election will certainly have an effect on how and how fast new compliance measures are implemented. But either way, no matter what happens we’re in a world of increased regulation.”
Murphy agrees. “In credit union trade associations’ contacts with lawmakers at the state and federal levels, they’re trying to get them to see the burdens new regulations are imposing. But even if we’re successful, it will probably take a while before the legislative avalanche diminishes.”