NAFCU’s award-winning team of industry experts discusses regulatory and legislative priorities that the industry should keep in mind
By Rouky Diallo
The credit union industry saw significant steps toward regulatory relief in 2019, including NAFCU-sought delays to the Financial Accounting Standards Board’s current expected credit loss (CECL) standard and the NCUA’s risk-based capital rules.
The industry also welcomed new regulators, with the additions of Chairman Rodney Hood and board member Todd Harper to the NCUA board, and Director Kathy Kraninger to the CFPB.
Amid an onslaught of renewed banker attacks to discredit credit unions, NAFCU made sure regulators, lawmakers and consumers knew that credit unions exist to serve the greater good.
NAFCU stands ready in 2020 — with a bold advocacy agenda, responsive compliance assistance and forward-looking education and training programs — to ensure a healthy and innovative environment in which credit unions can thrive and better serve the industry’s 118 million members.
To achieve this, NAFCU will push forward guided by its five tenets, which include:
- creating a legislative and regulatory environment that allows credit unions to grow;
- seeking appropriate, tailored rules for credit unions and both legislative and regulatory relief from growing burdens;
- ensuring a fair playing field, through regulatory and legislative processes, so credit unions have as many opportunities as banks and nonregulated entities to offer provident credit to the nation’s consumers;
- supporting transparency and independent oversight of all regulators, including the bureau; and
- maintaining a strong, independent NCUA as the primary regulator for credit unions.
As NAFCU continues its work as the industry’s Washington watchdog, members of its government aff airs team share their insights into key issues that should be on credit unions’ radar this year.
Regulatory Expectations
Q: NCUA Board Chairman Rodney Hood has stated that regulation needs to be effective but not excessive. What steps has the NCUA Board taken that reflect this mindset?
The NCUA has put out a proposal to delay its risk-based capital rule for further study and is going to work to mitigate the impact of CECL. What will be telling is if the NCUA will choose to issue more regulations on certain items like credit unions purchasing banks, or if they will choose to take a more flexible approach. Often, NCUA regulations are not the problem; credit unions are constrained by the Federal Credit Union Act (FCUA) or have stringent exams.
Q: How would you characterize CFPB Director Kathy Kraninger’s rulemaking philosophy following her first year as head of the bureau?
The CFPB appears to be taking a pragmatic approach to its rulemaking, but it has a large agenda and, of course, a statutory mandate to focus on consumer protection. The Home Mortgage Disclosure Act (HMDA), third-party debt collection and payday lending all could see some action. Of note, the CFPB decided to keep its database public for consumer complaints. So, while pragmatic, credit unions will still have some pain points coming out of the colossal agency.
Political Climate
political affairs
Q: Looking toward elections later this year, how will the environment affect Congress’ legislative agenda and NAFCU’s approach to advocacy?
The closer we get to the election, the more difficult it will be for Congress to accomplish much, if anything. Democrats’ and Republicans’ desire to deny the other side a “win” is strong and real. While Congress may not be passing substantive legislation that will benefit the credit union industry, there is important legislative work being done at the committee level that, once developed, will become the baseline for any future work on the issues. As such, NAFCU’s approach to advocacy will not change. We will remain laser-focused and continue to work with members and their staffs to ensure that the credit union voice is heard, understood and taken into consideration with any legislation that will impact credit unions.
Q: How can credit unions engage with lawmakers on key issues and partner with NAFCU in its advocacy efforts?
It is always important to weigh in with your senators and representatives when prudent, but I encourage credit union executives to develop a relationship and become acquainted with their representatives in Congress and their staffs. The easiest way to do this is to set up a meeting while they are home for a district work period, or to invite them to your credit union for a visit. The most important part of these meetings is the follow-up. Always follow up to thank them for their time and to let them know that this isn’t the end of the conversation. That way the door will remain open for the next time you need their ear, and they are more likely to remember you. Additionally, once you have that contact with a staffer or member of Congress, send them correspondence when an issue arises in Congress that may affect your credit union. Once they trust that you are a source for information on credit union issues, they will begin to reach out to you.
As always, NAFCU staff is available to update you on issues we are working on, provide you with materials to support our positions, or help you connect.
Agency Engagement
Q: What issues can we expect the NCUA and CFPB to prioritize this year?
The NCUA spent much of the second half of last year focused on capital reform for credit unions, including delaying its risk-based capital rules and working on a proposal for a new subordinated debt framework. Credit unions should expect to see continued focus on capital reform in 2020, as well as a few other issues Chairman Hood has identified as priorities: enhancing cybersecurity in the credit union system, reducing regulatory burden and finding ways to help underserved communities.
The CFPB has also been looking for ways to reduce regulatory burden by evaluating the effectiveness of its major rulemakings, including the ability-to-repay/qualified mortgage rule, the HMDA rule, its overdraft rule and its rule on remittance transfers. We expect the bureau to continue its rulemakings on these topics in addition to hosting more symposia and town hall meetings to gather information regarding broader issues on which the CFPB is looking to provide guidance or a rulemaking.
Q: Do you anticipate any significant rulemakings that credit unions can expect to see parity with banks on?
Throughout this year, credit unions can expect to see more parity in a few key areas, including capital rules and lending rules. Movement on a rulemaking for subordinated debt that provides all credit unions with access to supplemental capital would help align credit unions’ ability to issue debt instruments and access additional liquidity with that of banks. The NCUA has also been focused on helping credit unions implement the Current Expected Credit Losses (CECL) standard and plans to adopt a phase-in similar to that recently finalized for community banks. We also expect the NCUA to finalize updates to its threshold limit for real estate appraisals on residential properties to align with banks’ recently finalized rule. If Congress approves changes to the FCUA that give the NCUA flexibility to adjust maturity limits, we can also see parity on lending generally.
Legislative Priorities
president of legislative affairs
Q: Where does Congress stand on providing a safe harbor for credit unions and other lenders that wish to serve marijuana-related businesses?
With the House passage of the SAFE Banking Act, the focus is now on the Senate. In 2019, the Senate Banking Committee held its first-ever hearing on this issue. Senate Banking Committee Chairman Mike Crapo, R-Idaho, has indicated that he could try to mark up a bill in this area. It is still unclear if that would be the House-passed version of the SAFE Banking Act or a different bill crafted by the chairman. Either way, the Senate is a more difficult environment in which to move a bill like this, and passage this Congress is uncertain. Still, the historic House action and Senate hearing show that this is an issue on the congressional radar and that it ultimately needs to be addressed at some point.
Q: There have been calls from both financial institutions and lawmakers to address and decrease Bank Secrecy Act (BSA) and anti-money laundering (AML) burdens. Where does this issue stand in Congress, and what is likely to be accomplished this year?
The House passed significant BSA/ AML and Beneficial Ownership reforms in October, and there is some bipartisan support for addressing these issues in the Senate, where a bipartisan bill has already been introduced. These reforms are designed to try to improve the BSA system. Although it remains an uphill climb, this is the kind of issue that could pass into law this Congress, as a number of the proposals have broad industry and bipartisan support. The congressional activity in this area will also help keep pressure on the regulators to keep taking steps to improve the BSA regime as well.
Q: Bankers have relentlessly attacked credit union priorities, including the credit union tax exemption. What steps are being taken to educate lawmakers on the credit union difference?
NAFCU has been very active in educating Capitol Hill on the value of credit unions and the credit union difference in response to these banker attacks. We have a number of resources available to share with the Hill, including NAFCU’s study on the credit union tax exemption and an issue brief and webpage dedicated to outlining the credit union difference when it comes to banks. We also believe in pushing back and telling the truth about banks, such as the tax breaks they enjoy, and reminding Congress how banks helped cause the financial crisis.
Compliance Landscape
Q: What are some data privacy regulation developments that credit unions should be aware of this year?
While there is bipartisan support for federal legislation generally, Congress has not been able to establish momentum behind any single piece of cybersecurity or privacy legislation. With the future of a federal law being so uncertain, many states are studying or considering privacy and cybersecurity legislative proposals, three of which became state law. This year, absent federal action, it is expected that a state-by-state patchwork of cybersecurity and privacy laws will continue to form, creating uncertainty and regulatory complexity for credit unions.
Q: What do you think will be the main compliance challenge for credit unions?
To a certain extent, a credit union’s operations will have an impact on what its main compliance challenge will be, but there are a few things for credit unions to look out for this year besides data security trends. We expect the NCUA to conduct more fair-lending exams in 2020, and the agency is likely to take a harder look at HMDA compliance. The NCUA also continues its exam modernization initiatives, working to replace the current AIRES questionnaires with its new Modern Exam Risk Identification Tool, or MERIT. If there were to be an economic downturn this year, collections compliance issues might present challenges for credit unions, as some things may occur more often than we see in the current environment — like loss mitigation rules for mortgage servicing. Finally, the trend of litigation against credit unions may continue, perhaps with overdraft lawsuits, or with Fair Credit Reporting Act or Telephone Consumer Protection Act claims, especially if delinquency rates pick up, as that kind of litigation is sometimes seen alongside debt collection efforts.
Q: What compliance trends are you seeing in regard to BSA?
We continue to hear mixed reports from credit unions in terms of NCUA examinations for BSA compliance. It seems examiners have varied levels of knowledge or comfort with the BSA and in some cases are heavy-handed in questioning reasonable risk-based decisions in this area. We have also seen support in Congress for some BSA/AML reform, so if that gains additional traction in 2020, there could be some regulatory relief here as well as a congressional review of BSA examinations. The Financial Crimes Enforcement Network (FinCEN) continues to work on quantifying the value of information received in suspicious activity reports. Credit unions may also see FinCEN release guidance on hemp banking now that the U.S. Department of Agriculture has released its interim final rule for the industry.
Economic Outlook and Fintech
Q: There have been a number of rate cuts amid recession fears. Do you foresee the Federal Open Market Committee (FOMC) taking further easing measures in 2020? How can credit unions prepare?
What the FOMC wants to do and what it is likely to do are two different things. The committee clearly wants firmer economic data (especially inflation) and a reduction to downside risks, allowing for future rate hikes. This would add some badly needed ammunition to its arsenal in case of a recession. But the committee has an easing bias right now, and for good reason. Economic risks are highlighted by the trade war and slow business abroad. A more structural issue is weak inflation, which has gone on for so long that it is starting to impact expectations. This is a critical issue for the committee, as lower inflation expectations will make it much harder to reach its target for price growth, which has already proven exceedingly difficult to achieve. Credit union strategies should be robust to a variety of outcomes, but the most likely scenario is for further rate cuts in 2020. If that bears out, credit unions that are able to lock in yields now will fare best.
Q: The competitive dynamic of financial technology continues to be a hot topic, with regulatory agencies issuing policies meant to promote innovation and ensure credit unions are able to keep up. How would regulatory coordination lead to an even playing field for credit unions and fintech companies?
Regulating financial technology is a challenge. The field is dynamic, and the term itself is nebulous. Without a coordinated effort, the approach will either be insufficient or uneven (or both). Given the amount of capital pouring into fintech, any hole in the regulatory approach is likely to be exploited by existing fintech firms or startups. That has potentially grave consequences for consumers and depository institutions alike. It is for this reason that NAFCU released a white paper last year, Regulatory Approaches to Financial Technology, which provides a framework for regulators to address the challenges of fintech in a more structured and transparent fashion. This will allow credit unions to take advantage of technology to better serve their members, while providing adequate consumer protections and allowing for a level regulatory playing field.
Rouky Diallo is NAFCU’s associate director of communications
This article was published in the January-February 2020 edition of The NAFCU Journal magazine. Want to receive The NAFCU Journal in your inbox? Update your email preferences.
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