What credit unions can do today to prepare for regulatory change
While credit unions are quite optimistic about the outlook for their business and the economy in the year ahead, there’s one area that they’re remarkably pessimistic about: Their future regulatory burden. The National Association of Federally-Insured Credit Unions’ (NAFCU) Credit Union Sentiment Index (CUSI) recorded the lowest sentiment point on record in its January 2021 survey.
Priorities are surely changing, as the Consumer Financial Protection Bureau (CFPB), the White House and Congress are now very favorable to consumer protection. CFPB Director nominee Rohit Chopra has already stated the agency plans to reverse policies that weaken enforcement and supervision, and its Taskforce Document outlines consumer empowerment, disclosures, financial inclusion and civil penalties as priorities. If Chopra is confirmed, we will most certainly see the CFPB step up its penalties and enforcement. In Congress, consumer protection-oriented legislation that Democrats previously proposed, like the Stop Overdraft Profiteering Act (SOPA) of 2019, may be resurrected with new bills containing even more stringent guidelines under this administration.
It is also important to consider that this increase in regulatory enforcement is coming on top of an existing wave of litigation, where class action lawsuits against credit unions are growing every day, resulting in tens, sometimes hundreds of millions a dollar a year in settlements. Financial transparency is a hot target. In one case, the judge ruled that a credit union failed to act in good faith as it related to their overdraft program. In another, one of the largest credit unions in the country paid out $16 million on one settlement that was initially based on a complaint from a single customer related to deceptive practices in assessing non-sufficient fund (NSF) fees.
We don’t know exactly what future regulations, legislation or litigation might bring, but we know enough to start preparing. It’s not all bad news because, ultimately, maximizing consumer transparency helps credit unions further their mission to support their members. The trick is going to be to minimize the operations impact, and that takes strong planning and swift action.
By making smart moves now, credit unions and members can both win in this new environment.
Minimizing the impact to operations: an illustrative case
Let’s look at the potential impact of legislation like SOPA 2019 as a model for how credit unions can begin looking at the regulatory changes needed to improve consumer transparency in a world of increasing disclosures and enforcement. In a nutshell, this legislation proposed massive overhauls to current overdraft programs to protect consumers from excessive fees and vague language. This approach could essentially wipe out credit unions’ number one source of non-interest income: Non-Sufficient Funds (NSF) fees. The main reason I want to use this legislation as an illustrative case is that it requires prompt notification to members when overdraft is used—making the challenges of implementing Dodd-Frank in 2010 look like a walk in the park. It is also interesting to note that similar pieces of this legislation were originally proposed in both the House and the Senate, versus originating in the House and moving to the Senate, which indicates how hot of a priority this is for both legislative bodies.
The potential impact of legislation like SOPA falls into three main categories: technical, human and financial impact.
First, the technical impact. Almost every single core would need adjustments to its checking account structure to account for new fee structures. Alerts and notifications would also need to be added or adjusted, which is much more feasible but still not a normal event. Lots of testing would be needed here. Credit unions would also need to ensure that the right data could be extracted from their current systems, which could mean upgrades are needed.
The two major factors to consider when it comes to the technical impact of potential regulations are cost and timeliness. Of course, the two are closely intertwined. When SOPA 2019 was proposed, there was a one-year time window for financial institutions to implement these significant changes before fines started kicking in. That’s not likely to change given the urgent need for financial recovery from the pandemic and the desire for the new administration to begin showing progress on its agenda. That could have major implications for credit unions’ existing technology roadmaps and make prioritization a challenge. This timeliness factor will also increase the already significant costs credit unions will face in upgrading....-->
While credit unions are quite optimistic about the outlook for their business and the economy in the year ahead, there’s one area that they’re remarkably pessimistic about: Their future regulatory burden. The National Association of Federally-Insured Credit Unions’ (NAFCU) Credit Union Sentiment Index (CUSI) recorded the lowest sentiment point on record in its January 2021 survey.
Priorities are sur...