Like many people, I am getting tired of the regulatory onslaught. But, we need to stay diligent. There are advantages to paying attention. First and foremost, you might be able to influence the regulator and reduce the adverse consequences of a new rule. The industry spends a lot of time and a lot of effort trying to advocate changes to proposed rules, and this is an invaluable exercise that advances a credit unions position on the regulation.
Often proposed rules are only contemplated in the context of advocating changes, but a proposed rule can be used in another way. They offer us a glimpse into the mind of the regulator and pinpoints hot-button issues for you. You get an image of what is bothering the regulator or where the latest pressure points are. Because you can bet, if it is bothering them enough to propose rule changes, they think it should be bothering you as well.
But what does this have to do with compliance? We don’t need to comply with a rule that is proposed and not final. I agree, but the proposed rule should not be ignored when you think about compliance because there may be compliance concerns that transcend the particular rule. Rules are often proposed to implement a new policy stance on a particular business issue and this can be very informative for credit unions. Even before a rule is finalized or even if the rule is never finalized, your examiner will want to know what you are doing to manage the concern.
For example, the newly proposed loan participation rule seeks to implement a concentration limitation where buyers of loan participations are limited in the amount of aggregate participations they can buy from one lead lender. The limitation was set at 10% of a buying credit unions net worth. Many in the credit union industry, including NACUSO and our firm organized serious opposition to this proposed change and it appears from statements made by the NCUA that our voices were heard.
We understand that if a new regulation is passed it will include a higher percentage limitation. This is exactly why we fight and push and advocate. But, there is another side to this coin that can assist you in your future exams. Even if the proposed loan participation rule does not get finalized, you can be sure that this type of concentration risk will be a concern of your examiner. The examiner may or may not have a bright-line number, like 10% or higher, to work with but he or she will still want to make sure this risk is being assessed.
(As an aside, I think bright-line regulating is oversimplistic, paternalistic and a waste of the industry’s time. It certainly helps inexperienced or overworked examiners do their job more efficiently, but it does nothing to help the industry appropriately manage risk. But, that’s a topic for another day.)
I am not saying that you should comply with a proposed rule or that such rule is authoritative prior to finalization. For instance, until a new loan participation rule is finalized, there is no regulatory limitation on the amount of loan participations you can purchase from one lender. However, I am saying that we can use these proposals to assess where the regulator sees risks and the latest safety and soundness issues.
We can create a factual context for the examiner that explains how these risks are managed and mitigated. Just because the loan participation rule does not have the proposed limitation does not make the alleged concentration risk go away and does not mean that your examiner will not ask you about it. Credit union management should be in a position to address this risk concern in the factual context of its portfolio and assure the examiner that the credit union is managing this risk.
Therefore, paying close attention to the underlying policy and risk concerns raised in a proposed rule can help to prepare your credit union for future examinations and will allow you to proactively answer these concerns within the factual context of your institution. Knowing what the regulator is thinking and the latest hot-button issues will have a positive impact on your next exam. Be ready and be proactive.