Regulation Lemonade

Life often hands credit unions new regulations and other lemons. Yet the cooperative system has an impressive track record of clearing these obstacles or turning them into stepping stones for new growth.

 
 

Credit unions today are forced to comply with numerous regulations resulting from the financial crisis. New directives from Congress, the NCUA, and the Consumer Financial Protection Bureau have placed a burden on the cooperative system that is shouldered at the cost of employee time and member dollars. Yet credit unions have been able to adapt to these changes in ways that have generated marketplace advantages.

A Winner In The Wallet Wars

Passed to help consumers who fell victim to disingenuous lender practices, the Credit CARD Act of 2009 requires financial institutions to offer clearer disclosures on rates and fees. It also put limits on practices that maximize consumer fees, such as charging a fee to pay a bill over the phone or Internet instead of through the mail.

Experts predicted banks would raise interest rates to offset the drop in fee volume, which would ultimately hurt consumers. However, according to a recent study by University of Chicago economist Neale Mahoney, this has not happened. Instead, the law has helped consumers save $20.8 billion a year, primarily because it forces banks to compete on rates.

NUMBER OF CREDIT CARD ACCOUNTS
Data as of September 30, 2013
Members have opened more than 2.4 million credit card accounts since September 2008.
© Callahan & Associates | www.creditunions.com

cc-accounts

Source: Callahan & Associates’ Peer-to-Peer Analytics

And it wasn’t just consumers who benefited. Since the act took effect in 2010, credit union members have opened two million new credit card accounts, equating to a 16.7% growth in balances from third quarter 2010 to third quarter 2013. And this activity shows no sign of slowing; balances at the end of third quarter were up a full 7.6% year-over-year.

Although the average credit card balance is also increasing, up by 8.5% between third quarter 2008 and third quarter 2013, it appears many members are able to afford these terms. Credit card delinquency at credit unions was 89 basis points in the third quarter, below the 121 basis points that FDIC-insured banks reported. The lower delinquency is even more impressive given credit unions report loans delinquent after only 60 days of non-payment while banks report after 90 days.

Net charge-offs at credit cards tell a similar story, at just 196 basis points for credit unions as of third quarter 2013 compared to 344 basis points for banks.

YTD First Mortgage Originations And Market Share
Data as of September 30, 2013
Credit union mortgage market share has tripled in the past seven years.
© Callahan & Associates | www.creditunions.com

ytd-first-mort

Source: Callahan & Associates’ Peer-to-Peer Analytics

More Room In The Mortgage Business

Mortgage lending is also more tightly regulated in the wake of the financial crisis, and a bevy of regulations implemented in recent years coupled with the impending wall of new obstacles on the horizon has many financial institutions struggling to see daylight between the cracks.

The Dodd-Frank Act put into place regulations that include everything from making a reasonable effort to conclude that the borrower has the ability to repay to requiring appraisals before making a higher-risk mortgage.

[New QM rules] will encourage many financial institutions to create loans that are more standardized in their terms. This creates an opportunity for credit unions to help those members who otherwise wouldn’t be able to get a mortgage from another institution.” 

Many credit unions avoided the shady practices that caused the housing collapse in the first place; however, they are still required to comply with new regulations. Despite the additional burden, though, mortgage lending at credit unions has thrived in recent years. As regulations drove away banks and other lenders, credit unions found their historically conservative approaches left them well positioned to step up to the plate.

Year-to-date mortgage origination market share as of third quarter 2013 was 6.6% for credit unions, up from 2.0% in 2006, according to Callahan analysis based on data from the Mortgage Bankers Association. Persistent low rates helped credit unions reach record mortgage origination levels in 2012 and lend more than $124 billion toward the purchase of homes. As of third quarter, 2013 is on pace to set another record, with credit unions lending nearly $97 billion in first mortgages through the first nine months.

Despite the increased volume, cooperatives are keeping their underwriting standards strong. The industry posted a 1.28% delinquency rate for first mortgages as of third quarter 2013 compared to 6.57% for FDIC-insured bank mortgages on one-to-four unit family residential loans.

New regulations surrounding qualified mortgages (QMs) took effect this year, and as of January, QMs are the only type of mortgages that government-sponsored enterprises such as Fannie Mae and Freddie Mac will purchase. This will push many financial intuitions to create standardized loan terms, a trend that — en masse — could have a dramatic and negative effect on borrowers of modest means. In fact, some banks have already stopped making mortgages that don’t meet the criteria for QMs. This creates an opportunity for credit unions to help those who otherwise wouldn’t be able to secure a mortgage, particularly if the credit union is able to portfolio the loan.

The Value Of Breaking Even

Not all of these new regulations automatically end in a measurable benefit for credit unions. Unfortunately, in the majority of cases, the best you can hope for is to simply stay the course. Yet, given the abundance of challenges credit unions face every day, even that can be a win.

For example, regulators took aim at overdraft protection in late 2009 when the Federal Reserve issued a rule that required financial institutions to obtain consumer consent for overdraft protection instead of automatically enrolling them. Credit unions had already typically charged lower fees than banks, and since the regulation's implementation in mid-2010, checking account penetration at credit unions has increased. Penetration growth coupled with members opting-in to overdraft protection has helped fee income to remain stable at most credit unions nationwide.

Another example is the Durbin Amendment of the Dodd-Frank Act, a regulation designed to cap the fees that institutions with more than $10 billion in assets can collect from merchants when consumers use debit cards. The Federal Reserve was tasked with the actual rulemaking of the Durbin Amendment and it eventually settled on a rule of 21 cents per transaction plus five basis points multiplied by the value of the transaction. Although the asset size exempted nearly every credit union but the largest few, many predicted market forces would cause exempt issuers to lower their fees as well. This did occur, although not as dramatically as predicted, and credit unions have posted small but not significant declines in their fee income after the rule's implementation.

There are more regulations coming down the pike, and uncertainty combined with increased compliance costs aren’t positive variables for any credit union. But if history is any indication, these challenges will still present bountiful opportunities for credit unions looking to turn lemons into lemonade.

 

 

 

Jan. 13, 2014


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