Federal regulators made two significant moves in recent days, leaving as many questions as answers about these new frontiers in de-regulation.
The first was last Thursday when the NCUA board voted to change the definition of small entity in the Regulatory Flexibility Act (RFA) from credit unions with less than $50 million in assets to credit unions with less than $100 million.
That adds 733 more federally insured credit unions to the list of those eligible for special consideration in future rulemakings, bringing the total to 4,690, as well as qualifying more for services the NCUA offers to smaller credit unions.
That was followed by Monday’s announcement from the CFPBthat it had finalized its own rule that expands the definition of small creditors to those who issue less than 2,000 first-lien mortgages per year, up from the current 500.
The rule also finalizes Qualified Mortgage (QM) changes aimed at allowing lenders to better serve rural and underserved areas, including changes in ability-to-pay requirements and jumbo loans, and even the definition of rural itself.
Questions remain, such as how much the CFPB ruling will affect mortgage CUSOs and the credit unions that use them. That asset calculation now specifically includes them in the calculation of small-creditor status.
Sizing up size. NCUA Chair Debbie Matz issued a statement describing the work that went into determining the new threshold and its history, dating from her joining the board in 2002 when the small credit union definition was only $1 million. She also notes there was a lot of discussion about where to set the limit this time, including looking at the $550 million bar set by bank regulators for their industry.
Ultimately, we found those extremely high thresholds would be difficult to justify with the economic impact data. In every key metric, those larger credit unions are performing much better than credit unions under $100 million, Matz says.
It’s ironic that (the NCUA) has undertaken to treat the credit union community in a potentially more burdensome manner than if the community was subject to regulation by the banking regulators. A credit union with assets of less than $550 million is a small financial institution as is a bank at the same asset level. Small is small.
To me, just as compelling as the data were the small credit union officials I met with who urged us not to dilute our Regulatory Flexibility Act analysis by including almost every credit union in the United States. I took those concerns seriously, she says.
Excluding that many larger credit unions would pose too much risk to the NCUSIF, she argues. Her fellow Democrat on the panel, Rick Metsger, also points out that the $550 million threshold used for regulatory relief at banks covers only 6% of their population. Credit Union Times reports extensively on that debate here.
If credit unions were regulated by the FDIC, then lumping them in with banks might warrant a $550 million threshold, Metsger says. If you apply the same 6% standard to credit unions the credit union threshold would only be $58 million not the $100 million we approved Thursday when we doubled the existing threshold, only two years after it was last increased. We need to compare apples to apples and not apples to oranges.
The lone GOP appointee on the board, Mark McWatters, disagrees, calling it ironic that (the NCUA) has undertaken to treat the credit union community in a potentially more burdensome manner than if the community was subject to regulation by the banking regulators. A credit union with assets of less than $550 million is a small financial institution as is a bank at the same asset level. Small is small, he says.
Sucking out joy. I don’t think the limit was raised high enough. One reason mergers are occurring, especially among smaller credit unions, is due to the regulatory burden and the we just can’t do this anymore’ perspective, says Linda Bodie, president and CEO at Elements Federal Credit Union ($30.22M, Charleston, WV). Small credit unions are disappearing, and that’s a bad thing. They should not be taking the merger route simply because regulation sucked the joy out of being a credit union and doing what credit unions do best. That’s helping people.
Chris Howard, vice president of research at Callahan & Associates, says he sees no justification for credit unions to be supervised more strictly or more expensively than community banks. From a complexity standpoint, it would be better to draw the line on activity rather than size, but if size is to be used, $550 million is an entirely reasonable line, he says.
Howard adds that he’s sympathetic with those who feel that very small credit unions are significantly different than $500 million credit unions and should be regulated differently. But that’s an argument for a different grouping with even more relief, Howard says.
Bodie agrees with Howard that a different grouping might be a good idea, maybe one for credit unions up to $100 million, another for $100 million to $500 million, and then those at $500 million and up. Three tiers might make more sense in today’s environment and it might help protect the share insurance fund from more exposure, as Chairperson Matz referenced, the West Virginia credit union executive says.
The revised definitions of small entities and creditors will permit many more credit unions to focus time and resources on serving their members instead of jumping through unnecessary regulatory hoops.
Bodie also notes that the new threshold won’t affect her credit union now but it could down the road. That’s the same situation at Pacific Northwest Ironworkers Federal Credit Union ($19.72M, Portland, OR), where president and CEO Teri Robinson adds that she quit offering mortgage loans five years ago, so the CFPB change won’t matter there, either.
But her reason why also speaks to the reality of the regulatory burden for her credit union and others like it. Robinson says she quit making mortgage and equity loans because of the time and expertise required. She now refers that business to another nearby credit union that she trusts will treat her members fairly.
I just recently had a member who wanted to use $40,000 of the equity he has in the $200,000 home he owns, but I couldn’t, she says. But at least when I can refer them to this other credit union, I don’t have to worry about where my members have gone and what will happen to them.
Robinson also wonders whether examiners themselves really understand the new rules. She says a colleague from another small credit union told her that his examiner was discussing interest rate and concentration risk and told him that the threshold was still $10 million, not the then-current $50 million, much less the $100 million that was just approved. I forwarded him that regulation so he could share it with his examiner, she says.
Robinson says she has been talking to her own examiners and her league the Northwest Credit Union Association as they all prepare to work with a new rule that will mostly affect new regulations to come. Maybe. That’s not entirely clear yet, she says. I hear we all might go back and look at existing rules, too, to see if they might be part of this, too.
Some say yay. Less-qualified praise for the CFPB and NCUA changes came from other corners. The Cornerstone Credit Union League commends both the NCUA and the CFPB for taking steps to ease regulatory burdens on small credit unions, says Cornerstone’s Suzanne Yashewski.
The revised definitions of small entities and creditors will permit many more credit unions to focus time and resources on serving their members instead of jumping through unnecessary regulatory hoops, says Yashewski, senior vice president and regulatory compliance counsel at the league for more than 600 credit unions in Texas, Oklahoma and Arkansas.
Meanwhile, J. Scott Sullivan, president/CEO of the Nebraska Credit Union League, says the RFA changes add eight more Cornhusker State credit unions to the list, bringing to 52 (or 83%) the number of Nebraska credit unions qualifying for that regulatory relief.
The final rule regarding mortgages in rural and underserved areas was a welcome change. However the impact of the inclusion of affiliates such as CUSOs in the threshold calculations remains to be seen.
He says the CFPB’s expanded definition of small creditor also will help his credit unions better serve their members by allowing them to offer certain new mortgages in rural and underserved areas. The CFPB’s rule will provide greater opportunities for credit unions to continue this vital role, Sullivan says.
Miriam De Dios, president and CEO of Coopera, also says the changes will help credit unions her Des Moines, IA-based marketing and consulting firm serves. The NCUA threshold will allow more credit unions to apply for support services once reserved for only the smallest of cooperatives, she says.
And the CFPB loosening ability-to-repay and debt-to-income ratios will particularly help in emerging markets like various Hispanic consumer segments, who are often underbanked and underserved and have limited options when it comes to financial services, De Dios says.
One big question about the CFPB move remains, however. The final rule regarding mortgages in rural and underserved areas was a welcome change, says Cindy Williams, vice president of regulatory compliance at PolicyWorks in Des Moines, IA. However the impact of the inclusion of affiliates such as CUSOs in the threshold calculations remains to be seen.