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Financial Reform Bill Poses Problems for Credit Unions

Henry Wirz, President and CEO of SAFE Credit Union, provides his assessment of how the recent financial regulatory reform bill will affect credit unions.

Two years ago the nation’s banking system was on the verge of collapse. Congress drafted a massive bank reform bill that is intended to prevent a repeat of the problems that nearly brought the nation’s financial system to its knees. The lobbying and deal making behind the scenes revealed a lot about how strong the merchant and the automobile dealer lobbies are; however, it also revealed the limited influence that credit unions have in Congress. The credit union lobby has had some success in blocking or amending legislation that hurts credit unions, but can’t seem ever to pass new legislation that benefits credit unions, like allowing them to acquire alternative capital. Nevertheless, the credit union lobby was able to help shape measures in the bill that contain important new changes. Many of the changes would have been far worse without credit union lobbying. In the end, however, the bill contains a mixed bag of results that in total might end up doing more harm than good. Time will tell.

The reform bill contains important new changes (positive, negative or neutral) that will affect credit unions in the following key areas.

1. Negative. Debit card interchange represents about 30 percent of non-interest income at SAFE Credit Union. It is an important source of revenue. The reform bill will likely reduce debit card interchange. A 50 percent reduction would not be out of the question. The reform bill directs the Federal Reserve Bank to ensure that debit card interchange is reasonable and proportionate to the costs involved. While the bill suggests that financial institutions under $10 billion in assets are exempt from this provision, it is clear that in the long run only one interchange rate will prevail. This legislation follows other legislation that requires members to opt in for overdraft protection services and other legislation which regulates credit card transactions and ATM fees. The result of these and other legislations could dramatically lower credit union net income.
2. Negative. Merchants can set minimums on credit card transactions, which will create confusion and limit both member convenience and credit union interchange income.
3. Positive. Members will now have a permanent $250,000 NCUSIF insurance coverage.
4. Positive. The reform bill gives bank shareholders “a say on pay” with the right to a non-binding vote on executive pay and golden parachutes. There is also a new requirement that compensation committees only include independent directors. Finally the bill requires public companies to set policies to take back executive compensation if it was based on inaccurate financial statements that do not comply with accounting principles. Although this legislation does not apply to credit unions, credit union boards should see it as a harbinger of greater oversight by members and regulators of executive pay and performance. The new IRS 990 Form for state chartered credit unions discloses executive compensation information that will eventually draw member attention. Credit union boards should look at their compensation policies and executive oversight to see if they meet the standards now imposed on banks. Those standards will eventually be imposed on credit unions.
5. Neutral. Credit unions under $10 billion in assets are exempt from the proposed consumer financial protection bureau. But the message is clear that Congress is looking closely at consumer protection. Credit unions can expect more oversight from the NCUA and their state regulators on all consumer compliance issues.
6. Neutral. Consumers who are denied a loan because of their credit score or are offered an interest rate that they deem is too high will have the right to see the credit score. Credit unions will have to train staff and members on the use of credit scores and their meaning.
7. Negative. The auto dealers’ lobby was successful in blocking an amendment to put auto dealers under the supervision of the Bureau of Consumer Financial Protection. Instead, the Federal Trade Commission (FTC) will continue to oversee auto dealers. The FTC has been given new powers to develop and enforce new rules to protect consumers from unfair and abusive auto financing transactions. This raises the question of whether the FTC will look at subvention financing and require auto dealers to disclose how subvention financing affects the price of the car. Such a review could help credit unions compete with subvention financing.
8. Positive. The crisis in the corporate system revealed that the ratings assigned by rating agencies were not very reliable indicators of future financial performance. The new reform bill allows lawsuits to be filed for irresponsible actions by the rating agencies. The bill also puts in place SEC regulations that will prevent securities issuers from shopping for rating agencies that will gave them the highest rating.
9. Positive. The bill may limit how quickly banks can grow and how much net income they can earn. The bill increases capital requirements, limits risk taking by banks and increases government oversight. All of these changes will likely limit bank growth and profits. If banks are less profitable, they will find it harder to raise capital through retained earnings and by selling stock to investors. If banks are limited in their risk taking they will earn less and be less attractive to investors.
10. Positive. The reform bill attempts to eliminate the problem of “Too Big To Fail”. Whether or not the bill succeeds, it does impose new requirements that make it less desirable to become so big that the new rules apply. A large percentage of the nation’s deposit market share is held by large national banks. The large banks are credit unions’ greatest competition. The new rules may help credit unions gain market share as big banks limit their asset size and scope of operations.