At its October board meeting, the NCUA released a final liquidity rule to be put in place by March 2014, announced stress tests for the largest credit unions, the implementation of diversity reporting for credit unions with more than 100 employees, and mandatory electronic filing of all financial reports.
NCUA is imposing these requirements as the CFPB is creating an avalanche of real estate rules that take effect in January 2014 — just over 60 days away. Real estate lending is more than 50% of credit union portfolios and has been the primary driver of both income and loan growth since the Great Recession. Here is how one credit union leader describes the cumulative scope of this CFPB blizzard:
“The new CFPB regulations will significantly change the way mortgage lending is done,” says Tim Mislansky, senior vice president and chief lending officer at Wright-Patt Credit Union and president of myCUmortgage. “With these new rules, there’s a lot of work to do to understand the policy implications, the procedural implications, and the risk tolerance for each credit union. And beyond this, all of the lending system must be updated to stay in compliance.”
But with the revisions or clarifications being issued by CFPB, the rules of the game keep changing. And Mislansky has heard from some credit unions that it will reduce or eliminate the availability of home loans for their members.
“I’m concerned many credit unions will just become fed up and leave mortgage lending," Mislansky says. "Or if they stay in the game, the cost to comply will either be passed on to members, making it too expensive for them, or absorbed by the credit union, making them less profitable. Both options hurt our cooperatives.”
There are six new regulations, the originals of which included more than 3,500 pages. These rules incorporated underwriting, ability to pay, loan officer compensation, appraisals, and servicing.
“The downstream impact is that secondary market sales are changing, as well,” Mislansky says. “Since the original publication of each rule, almost all of them have been revised once — and some twice — as recently as September.”
Time For Restraint
The Greek philosopher Plato listed restraint as one of the four cardinal virtues, along with courage, wisdom, and justice. Why did he choose restraint along with three more commonly recognized qualities? Restraint by leaders, especially by people in authority, recognizes that individual freedom and responsibility are essential for a democratic society. Without restraint, every problem becomes an excuse for another rule and inevitably more government-mandated direction.
With institutions, including credit unions, getting snowed under by CFPB real estate rulemaking, NCUA’s logical response should be to facilitate compliance. That way, members could count on their credit union and know the regulatory adjustment process would not impede the most important financial decision most members will ever make.
Setting compliance priorities would give credit unions a head start in this critical transition period. It would recognize the extraordinary burden placed on a system that did not cause the problem. It would communicate awareness of the impact of government rulemaking on credit union management and members.
Right now, public trust in government is low. There is a widespread perception that governmental leaders don’t listen, can’t compromise for the common good, and issue directives that only make our lives harder.
By postponing new NCUA rules and opening discussion about the priorities needed to succeed, NCUA and state regulators could begin a new era of dialogue. This is especially important to better understand how the cooperative system can best respond to liquidity needs; for the final rule, as written, would make credit unions dependent on government resources, just as recent events have shown that reliance on government action to be uncertain and, probably, unwise. Further, the liquidity rule is itself an outcome of NCUA actions to unilaterally defund the cooperative CLF-corporate liquidity safety net without an alternative in place.
Cooperative regulation should be focused on creating self-funding solutions, not mandating more reliance on government.
Leadership And Cooperative Principles
The cooperative foundation is the major difference — and a genuine difference — between credit unions and other financial firms. It places members’ interests at the center of all decisions. It precludes the inevitable institutional conflicts in banking between owners and customers, shareholders’ expectations, and public confidence. Moreover, the member-owner model is based on self-help, self-improvement, and self-funding.
These very real institutional differences have contributed to sustainable credit union success in a time when confidence in many other financial systems is suspect. Calling a timeout on new regulation would signal confidence in not only the credit union system but also in the cooperative approach to regulatory oversight.