Regulatory Reform

Updated February, 2010

On June 17, 2009, the Obama Administration released its plan for reforming the financial regulatory system.   The Administration’s proposal, known as the “White Paper,” seeks to overhaul the regulation of financial institutions in the United States.   The authority of the NCUA as credit union regulator was maintained in the White Paper’s regulatory reform proposals.   However, the White Paper proposed that consumer protection powers of all financial regulators, including the NCUA, be consolidated within a newly created Consumer Financial Protection Agency (CFPA).   The agency would have jurisdiction over a broad range of federal consumer protection laws, including TILA, TISA, HOEPA, RESPA, and HMDA.   The CFPA proposal was encompassed in legislation introduced by Financial Services Committee Chairman Barney Frank (D-MA) known as H.R. 3126, the Consumer Financial Protection Agency Act.

Under H.R. 3126, the CFPA would have a number of new rulemaking and regulatory powers to further its goal of protecting consumers from unfair or deceptive acts and practices, and would have the authority to examine institutions and enforce these rules and regulations.   The bill also calls for new disclosure requirements, which would be up to the Agency to delineate, and mandates that the Agency propose a new combined model TILA and RESPA disclosure. Finally, H.R. 3126 provides that the laws of any state adopting more stringent rules and regulations than those promoted by the CFPA will not be preempted by the Agency.

NAFCU has significant concerns about the new agency’s jurisdiction over credit unions, and, recognizing the need to rein in bad-actors, has instead proposed that the CFPA’s authority extend only to unregulated, non-depository institutions that operate in the financial services marketplace.   For federally-insured depository institutions, including credit unions, NAFCU has proposed the creation of an Office of Consumer Protection within each functional regulator.   By giving the CFPA consumer protection authority over credit unions, NAFCU is concerned that this could lead to an additional regulatory cost and burden on an already heavily-regulated industry.   Additionally, NAFCU believes that the functional regulators and any new CFPA must maintain federal preemption authority.   Allowing a state to create new and onerous burdens for credit unions that have a limited presence there could severely increase compliance costs and limit credit union services.

H.R. 3126 passed the House Financial Services Committee in October, with a limited exemption from the examination and enforcement authority of the CFPA for credit unions with assets under $1.5 billion.   The CFPA was then included as part of a broader regulatory reform bill in the House, known as H.R. 4173, the Wall Street Reform and Consumer Protection Act.   The Act merged H.R. 3126 with several other pieces of legislation, including H.R. 3996, the Financial Stability Improvement Act.

Among other provisions, H.R. 3996 would set up a “Systemic Dissolution Fund” to help pay for the winding down of failing non-bank financial firms.   The language in the original bill stated that financial institutions with over $10 billion in assets would contribute to the Fund, including three natural-person credit unions.   NAFCU lobbied heavily in favor of exempting all credit unions by increasing the threshold to $50 billion through an amendment offered by Representative Brad Sherman (D-CA).   When the amendment came to a vote in the Financial Services Committee in November, it passed by a wide bipartisan margin of 52 to 17.

The Wall Street Reform and Consumer Protection Act, which included H.R. 3126 and H.R. 3996, came to the Rules Committee and then the House floor in early December.   Several additional amendments of interest to credit unions were introduced at that time.   First, the bill was amended in the Rules Committee to increase the threshold for CFPA examination and enforcement authority over credit unions to $10 billion in assets.   Although more credit unions have been exempted, NAFCU is concerned that the $10 billion threshold was not indexed to account for inflation, which leaves the door open for the inclusion of additional credit unions within only a few years.   NAFCU also does not support arbitrarily splitting the credit union industry based on asset size, as this could possibly lead to future divisions on other issues.  Furthermore, it should be noted that these exemptions still give the CFPA authority to write new rules and regulations for credit unions to follow, as well as give the CFPA authority to independently step in and take action against a credit union to enforce these rules.

Also of note was an amendment introduced by Representative John Conyers (D-MI), adding language permitting judicial modifications of mortgages in bankruptcy (“cram-down”) to the bill. NAFCU remains concerned about giving bankruptcy judges broad cram-down authority, and again lobbied against this renewed effort.   The amendment was soundly defeated in the House by a vote of 188 to 241. H.R. 4173, the Wall Street Reform and Consumer Protection Act, passed the House on December 11.

Senate Banking Committee Chairman Chris Dodd (D-CT), introduced similar legislation in the Senate, known as the Restoring American Financial Stability Act. Much like H.R. 4173, the bill would establish a Consumer Financial Protection Agency with authority over credit unions.   However, the Senate legislation is more troubling than the House version for several key reasons:

• Funding: credit unions over $10 billion in assets will be assessed for funding the CFPA, while credit unions under $10 billion may be assessed;

• Examination and Enforcement: all credit unions will be subject to this authority;

• Community Reinvestment Act: the CFPA would administer and possibly expand the CRA to a number of entities, including credit unions.

Members of the Senate Banking Committee have been working together to try to compromise on a number of more contentious issues in the bill, including the CFPA, and may release a new draft of the legislation within the next few weeks.   Recently, talks between Chairman Dodd and Committee Ranking Member Richard Shelby (R-AL) have broken down over the idea of creating a new CFPA.  While Dodd has indicated he may be open to changes in how consumer protection issues are handled, he and Senator Shelby continue to have differences.  This has led to Chairman Dodd reaching out to Senator Bob Corker (R-TN) in trying to reach a deal.  The Committee is expected to mark up the bill this Spring, and then send it to the full Senate for a vote.   NAFCU continues to believe that credit unions should not be subject to any new regulatory burdens or oversight under a new CFPA.  Additionally, we believe that credit unions should not be forced to pay what is in essence their members’ money to bail out for-profit actors as part of any systemic risk fund.  We will continue to work to ensure the most favorable outcome possible as Congress moves forward with financial regulatory reform legislation.