Regulations push America’s credit unions to the brink

In addition to the woodland caribou, the bighorn sheep, and the masked bobwhite, you can add this to America’s list of endangered species: the small credit union.

Chalk up that threat to the same culprit: Humans. In this case, it’s death by a thousand paper cuts from Washington legislators and regulators who have been carving up small financial institutions with compliance costs since the Great Recession. Worse, the prognosis in the Capitol is for more of the same bad medicine.

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America’s credit unions were not the cause of the financial crisis. On the contrary, our not-for-profit, member-owned, cooperative business model guides us to serve our members with attractive rates on savings, loans and credit cards rather than piling on risk to please shareholders with a higher dividend or rising stock price on Wall Street.

Yet, since passage of Dodd-Frank in 2010, which led to the creation of the Consumer Financial Protection Bureau (CFPB), regulatory costs for credit unions have risen by 39 percent. While this hits all of America’s credit unions regardless of size and impacts the financial benefits they extend to members, it hammers small credit unions and the communities they serve particularly hard. That’s because smaller financial institutions lack the scale to spread their regulatory costs across a larger base. Typically, they’re forced to dig out from the regulatory blizzard by adding costly staff or reducing services that benefit their members. And by comparison, even the largest credit unions are small when compared to the trillion-dollar mega banks that destroyed the American economy in the financial crisis.

In response to growing concerns of credit unions across the U.S., our trade association commissioned a study to gather hard numbers from credit unions to quantify the damage and delivered the results this week to Congress. Our findings: The regulatory cost impact on the credit union industry was $6.1 billion in 2014 and the lost revenues to credit unions from services that were discontinued or reduced because of added regulation is at least an additional $1.1 billion. This total impact of $7.2 billion is equivalent to an astonishing 80 percent of credit union industry earnings and six percent of our credit unions’ net worth.

The disproportionate impacts from Dodd-Frank, the Durbin Amendment, the CFPB and the bureau’s Qualified Mortgage Standard, and other regulations are borne by credit unions, particularly ones with assets of $100 million or less. These firms already face a significant challenge in keeping up with the rapid technological changes in the financial services industry.

Add in the unnecessary burdens from Washington and the effects can be devastating, which is why industry-wide consolidation is picking up speed. Membership in credit unions has grown to a record 105 million member-owners, but the number of credit unions that serve those members has decreased by 25 percent since the beginning of the financial crisis. Among the 6,000 credit unions that remain, large and small, our study found they now spend over a quarter of their staff time dealing with the impacts of regulations.

How did this happen, when the stated goal of financial reform was to rein in “big banks” and those considered too big to fail? In a bid to clean up a broken financial system, Washington rounded up more than the usual suspects. It threw in innocent entities like credit unions and community banks that played no role in the financial crisis and should have been held harmless.

We recognize that we operate in a regulated industry and that there is a related cost of doing business. However, the recent increase has been excessive, and we would provide more benefit to our members and our communities if we spent less on compliance and more on member services: lower interest rates for consumers buying a house or a car, and higher interest rates on savings.

That is why we ask for a pause in the promulgation of further regulation and the enactment of compromise legislation to roll-back laws that are causing the damage to credit unions and other smaller institutions, or to exempt them from these laws. For America’s small credit unions, regulatory restraint would offer more than relief in terms of costs and a boon to their members. It could be a lifesaver.

Nussle served in the House from 1991 to 2007, and was director of the Office of Management and Budget from 2007 to 2009.  He is the president and CEO of the Credit Union National Association (CUNA).

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