May 1, 2012
As credit unions continue to shoulder the ever-growing weight of the regulatory burden, the Consumer Financial Protection Bureau (CFPB) has added a new wave to the sea of regulation. But how has the bureau, which has been full-operational since Richard Cordray’s introduction as director in early 2012, affected credit unions?
“One [way] is what you might call the examination side, where the CFPB only has authority to directly examine credit unions that are over $10 billion, so there are very few credit unions that would directly be examined by the CFPB,” said Hal Scoggins, an attorney with Farleigh Wada Witt in Portland, Ore., and featured presenter at the Northwest Credit Union Association’s (NWCUA’s) upcoming Legal Update Seminar. “But those that have started the process, we’ve heard that the CFPB has really gone in with a vengeance, so to speak.”
Scoggins said that one of the first credit unions to come under CFPB scrutiny, was met with a large team of examiners, including a couple of attorneys, who studied the credit union “with a fine-tooth comb.”
“Now, most credit unions aren’t going to have to worry about that,” Scoggins said. “however, the CFPB still has what you might call indirect oversight or examination authority in that they can respond to consumer complaints, and if they get a complaint from a member about something a credit union is doing, then they can ask the credit union to respond to that complaint.”
BECU recently became the fourth credit union in the nation to exceed $10 billion in assets, having reported nearly $10.6 billion as of March 31, meaning the Washington-based credit union will now be under direct CFPB supervision after seeing nearly $620 million growth during the first quarter of 2012.
Scoggins said that as the public becomes increasingly aware of the CFPB, more and more consumer complaints are likely to be funneled to the bureau, meaning credit unions are likely to have to answer more frequently to the CFPB, “even if it’s not directly by virtue of having the CFPB come into their shop and look at them,” Scoggins said.
“We’ve seen that they are ready, willing and, it looks like, able to become more and more active in areas where things may have even been stable for the past few years,” Scoggins said.
The CFPB has ramped up its efforts following Cordray’s appointment, particularly in the mortgage lending arena, a sector in which many consumers suffered in the past decade.
“One of the first things up on the CFPB’s radar screen in terms of actually overhauling regulations was Truth In Lending and RESPA for real estate lending transactions, and in credit unions, those who have been involved in real estate lending know that our world completely changed in January of 2010 when the RESPA regulation was completely revised by the Department of Housing and Urban Development (HUD), which at that time had responsibility for RESPA. It completely changed the way we go about disclosing primarily settlement costs, but also parts of the loan transaction. And then it also completely changed the way we go about processing and closing transactions and disclosing those transactions.”
After all the costs associated with those changes and the shifts in technology and culture that took place, everything is now about to change again.
“The CFPB said, ‘You know, it’s still too complicated. It’s still too difficult, and consumers still aren’t getting good disclosures, so we’re going to back up and start completely over,’” Scoggins said. “They’ve been working on that for a couple years now, and by the end of this year, in theory, they should be finalizing that process and coming out with their proposal for completely new forms and procedures that we’ll have to follow. It won’t be effective immediately, but we’re getting to a point where we’re going to start to see another sea change in the way that we do real estate loans, so credit unions are going to have to be ready for that in terms of cost and employee time and procedures and everything else.”
Scoggins said the CFPB’s second significant effect on credit unions came in the form of new restrictions and disclosure procedures around the types of fees and interest charged on credit cards.
“They’ve been working on that at a less feverish pace than they have on the mortgages, but those changes will be coming down the pipe soon,” he said.
With those changes will be increased scrutiny in a number of other areas as well, as the CFPB’s spider web of authority and examination slowly creeps into new arenas and new markets.
“They’ve put out a request for comment on overdraft practices and overdraft fees that financial institutions charge,” Scoggins said, “and they’ve indicated that that’s an area that they think they really need to be aggressive in and probably step up and issue some new regulations that will impact how credit unions treat overdrafts, how credit unions disclose overdraft fees to members and when credit unions can and can’t charge for overdrafts.”
The CFPB also recently issued a bulletin regarding an equal opportunity issue known as “disparate impact.”
“What that means is, if for some reason you have a loan policy or procedure or practice that has an impact more on one class of people than it does on the other—even if you’re not overtly discriminating against that class—the CFPB’s going to look at that and they’re going to come in and say, ‘These groups of people are being affected differently by your policies and practices. Prove to us that you’re not discriminating against this group.’”
All indications are that the CFPB will work vigilantly on the issue, and that could end up opening a can of worms for credit unions whose programs or practices aren’t intentionally discriminatory but do have a varied impact on different consumer groups.
“It’s been something that has been, over the years, a topic of contention among various groups within the industry and various consumer groups and others, and there’s a difference in viewpoint in terms of what the actual discrimination is,” Scoggins said. “The Department of Justice and most attorneys had previously operated under the theory that disparate impact may provide evidence of discrimination, or it may be the result of a practice that is discriminatory, but disparate impact isn’t automatically a violation in and of itself. The CFPB [has] given an indication basically that if there’s disparate impact, they see that as discrimination, and if they believe there is disparate impact, the burden is going to be on us to show why there’s not discrimination in a way that there really hasn’t been before.”
Much of the CFPB’s actions in its so-far brief history has been to act essentially as an intermediary between consumers and financial institutions, serving as a conduit for complaints and a receptacle of sorts for consumer issues, many of which would have reached the financial institution with or without the CFPB’s intervention. However, rather than seeing this as being a redundant service, Scoggins said the bureau will likely continue to fill this role.
“They see the complaints as a way for them to gather information that helps them do their job of being a watchdog, or to use Elizabeth Warren’s term, ‘the cop on the beat,’” Scoggins said. Because fielding complaints from the public affords the bureau such unfettered access to information about various financial institutions and various sectors of the industry, Scoggins expects this to be a practice that only expands as the CFPB becomes more established.
“That, in a lot of ways, justifies their existence. The more complaints they get, the more things they deal with, then the more they can say they’re doing.”
Interested in Learning More?
Scoggins will be a featured presenter at the NWCUA’s upcoming Legal Update Seminar, providing insight and analysis on current legal issues for credit unions, including the latest in the onslaught of lending regulation changes, the most recent proposed NCUA regulations and the newest wave of litigations on anticipated lending changes. Scheduled for May 15, 2012, in Tigard, Ore., this one-day seminar will include a morning regulation round-up and an in-depth analysis in the afternoon on one key area that affects credit unions.
Registration information and additional details about the seminar are available on the Association’s website.
Scoggins is an attorney with Farleigh Wada Witt in Portland, Ore., and has been providing legal advice to credit unions since 1991. His practice focuses on state and federal regulatory compliance, deposit and lending operations, contract and business matters, corporate governance, credit union service organizations (CUSOs), and all other aspects of financial service delivery. Scoggins frequently conducts seminars on legal matters for the NWCUA, CUNA councils and other trade groups, and he is an active member of the Consumer Financial Services and Credit Union committees of the American Bar Association.
Questions? Contact Training Programs Coordinator Yuri Jung: 206.340.4817, email@example.com.