Senate Banking, Housing and Urban Affairs Committee Hearing
Federal Information & News Dispatch, Inc. |
Testimony by
Introduction
Good morning Chairman Johnson, Ranking Member Crapo and Members of the Committee. My name is
I have 40 years of experience in the financial services sector and have been with XCEL since the beginning of 2001, first as Vice President of Operations, where I helped implement our disaster recovery operations post-9/11, and then as President and CEO from 2006 until today.
As you are aware, NAFCU is the only national organization exclusively representing the interests of the nation's federally-chartered credit unions. NAFCU-member credit unions collectively account for approximately 69 percent of the assets of all federally chartered credit unions. NAFCU and the entire credit union community appreciate the opportunity to participate in today's hearing regarding the state of our nation's smaller financial institutions, such as credit unions.
Historically, credit unions have served a unique function in the delivery of essential financial services to American consumers. Established by an Act of
Every credit union, regardless of size, is a cooperative institution organized "for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes." (12 USC 1752(1)). While over 80 years have passed since the Federal Credit Union Act (FCUA) was signed into law, two fundamental principles regarding the operation of credit unions remain every bit as important today as in 1934:
* credit unions remain wholly committed to providing their members with efficient, low-cost, personal financial service; and,
* credit unions continue to emphasize traditional cooperative values such as democracy and volunteerism.
These principles apply for all credit unions, regardless of their size. When compared with the nation's "Too Big To Fail" financial institutions, all credit unions are "small" institutions. It is with this fact in mind that NAFCU believes that there should not be artificial or arbitrary asset thresholds established for which size credit unions should receive regulatory relief. The challenges facing the industry impact, or stand to impact, all credit unions and all ultimately need relief.
I. Increased Regulatory Burden has Impacted Credit Unions
Credit unions have a long track record of helping the economy and making loans when other lenders often have left various markets. This was evidenced during the recent financial crisis when credit unions kept making auto loans, home loans, and small business loans when other lenders cut back. Still, credit unions have always been some of the most highly regulated of all financial institutions, facing restrictions on who they can serve and their ability to raise capital.
Credit unions continue to play a crucial role in the recovery of our nation's economy. Credit unions remain a relatively small part of the marketplace when compared to the banking industry. They are oftentimes a lender of last resort for consumers that have been denied credit via other financial institutions. As detailed in the chart below, on average from 2005-2013, credit unions consistently outperformed banks with lower interest rates on loans and higher returns on savings and deposits.
Today, credit union lending continues to grow at a solid pace, up about 18% in June compared to 2009. In short, credit unions didn't cause the financial crisis, helped blunt the crisis by continuing to lend during difficult times, and perhaps most importantly, continue to play a key role in the still fragile economic recovery. Although credit unions continue to focus on their members, the increasing complexity of the regulatory environment is taking a toll on the credit union industry. While NAFCU and its member credit unions take safety and soundness extremely seriously, the regulatory pendulum post-crisis has swung too far towards an environment of overregulation that threatens to stifle economic growth. As the
During the consideration of financial reform, NAFCU was concerned about the possibility of overregulation of good actors such as credit unions, and this was why NAFCU was the only credit union trade association to oppose the
Unfortunately, many of our concerns about the increased regulatory burdens that credit unions would face under the
The impact of this growing compliance burden is evident as the number of financial institutions continues to decline, dropping by 21% (more than 1,600) institutions since 2007. This trend rings true for credit unions as well, and a main reason for the decline is the increasing cost and complexity of complying with the ever-increasing onslaught of regulations. Since the 2nd quarter of 2010, we have lost 1,025 federally-insured credit unions, 96% of which were smaller institutions below
This growing demand on credit unions is demonstrated by a 2011 NAFCU survey of our membership that found that nearly 97% of respondents were spending more time on regulatory compliance issues than they did in 2009. A 2012 NAFCU survey of our membership found that 94% of respondents had seen their compliance burdens increase since the passage of the Dodd-FrankAct in 2010. Furthermore, a
At XCEL FCU we have felt the pain of these burdens as well. There are costs incurred each time a rule is changed and most costs of compliance do not vary by size, therefore it is a greater burden on smaller credit unions like mine when compared to larger financial institutions. We are required to update our forms and disclosures, to reprogram our data processing systems and to retrain our staff each time there is a change, just as large institutions are. Unfortunately, lending regulation revisions never seem to occur all at once. In recent years, XCEL FCU has spent over
In some cases, our ability to provide service to our members has been hindered. For example, XCEL FCU eliminated processing outgoing international wires and ACHs due to the complexity of the revised remittance regulations that were implemented. We felt the risk and compliance requirements involved with providing these services were excessive.
In 2013, the
NAFCU continues to hear from its member credit unions that "enough is enough" when it comes to the overregulation of credit unions. Small credit unions are going away and larger credit unions are even having a hard time keeping up. If
II. NCUA's Risk-Based Capital Proposal: Regulating Credit Unions Out of Existence
The biggest challenge facing XCEL FCU today is NCUA's risk-based capital proposal. Capital requirements should not be a substitute for proper credit union management or appropriate examinations. The proposal, as it is written, would negatively impact XCEL FCU, taking us from a well-capitalized credit union to adequately-capitalized. This proposal will be putting restraints on the growth of credit unions and will restrict XCEL from implementing products and programs which are needed to compete in the financial industry. While the NCUA has stated that one of the primary purposes of this rule is to protect the
This ongoing issue is of the utmost importance to credit unions of all sizes and the one-size-fits-all approach currently being taken by NCUA will stifle growth, innovation and diversification, not only at XCEL, but at credit unions in general.
The proposed rule will force XCEL's board and management to change our business model even though we have had steady balanced growth with good solid returns over the past few years. We have developed a sound concentration risk policy and set limits on our diversified loan and investment portfolio. This proves that our credit union has been managing this portion of the business well for years. If the NCUA continues forward without heeding current concerns on the proposal, XCEL would need to curtail certain aspects of our lending, ultimately hurting our members and the local economy.
NAFCU's Economics and Research department prepared the impact analysis graph found below that outline the impact the proposal would have on credit unions based on their asset size. NAFCU's analysis of the proposed rule determined that credit unions with more than
While NCUA contends that a lower amount of capital is actually needed to maintain current capital levels, the agency ignores the fact that most credit unions maintain a capital cushion above the minimum needed for their level - often because NCUA's own examiners have encouraged them to do so. Because credit unions cannot raise capital from the open market like other financial institutions, this cost will undoubtedly be passed on to the 98 million credit union members across the country. A survey of NAFCU's membership taken found that nearly 60% of respondents believe the proposed rule would force their credit union to hold more capital, while nearly 65% believe this proposal would force them to realign their balance sheet. Simply put, if the NCUA implements this rule as proposed, credit unions will have less capital to loan to credit-worthy borrowers, whether for a mortgage, auto, or business loan.
Additionally, it is also worth drawing the Committee's attention to the chart below breaking-down risk-weighting at the
* Several issues related to NCUA's legal authority to issue the rule as proposed, such as:
o Comparability with banking regulatory requirements;
o Substitution of statutorily defined legal terms;
o Individual minimum capital requirements;
o Definition of a "complex" credit union;
* The need for a legislative solution in order to achieve a fair and balanced risk-based capital system;
* NCUA's treatment of the regulatory process including the refusal to extend the comment period, form an industry working group prior to releasing a proposed rule, and the need for an additional notice of proposed rulemaking with public comment period;
* NCUA's drastic understatement of credit unions that will be affected by this rule and whose balance sheets and business plans will need adjustment;
* NCUA's proposed risk-based capital ratio for well capitalized credit unions set at 10.5 percent;
* NCUA's treatment of risk-weighted assets and the lack of explanation for deviation from similar banking risk-weights;
* NCUA's incorporation of interest rate and concentration risk into risk-weighting for real estate, investments, and member business loans (MBL's);
* Individual minimum capital requirements for credit unions including issues with the subjectivity of their imposition;
* Components not included in the numerator portion of the risk-based capital ratio, such as goodwill;
* The 1.25 percent cap on Allowance for Loan and Lease Losses (ALLL) especially considering the
* Supplemental capital authority is needed now more than ever considering the restrictions brought on by this rule; and
* The proposed 18-month implementation timetable is not long enough for a rule as complex and impactful as this proposed rule.
Many of these concerns were also expressed by XCEL FCU in our own comment letters (attachment B) and by the numerous Members of
Despite NCUA's refusal to extend the official comment period, this summer's listening sessions on the proposal in
As many of you are aware, the Administrative Procedure Act (APA) not only mandates consideration of all submitted comments, but it also requires an agency to engage in a subsequent comment period when the agency makes such substantive changes to a rule that it is no longer a logical outgrowth of the proposal. If NCUA implements changes to the proposed rule in accordance with even some of the 2,000 comments received, the changes will be substantive, and more than mere adjustments or clarifications to the initial proposal. In fact, both Chairman Matz and Board Member Metsger have publically supported changing the treatment of risk-weighted assets. NAFCU believes that this change alone would be substantive under the APA and warrant reissuing the proposal for public comment.
Furthermore, NAFCU encourages NCUA to allow credit unions the opportunity to voice their thoughts and concerns. The 2,000 comments submitted for the proposal clearly exemplify that credit unions around the country have a vested interested in this issue and they deserve the opportunity to comment given the magnitude of the potential negative impact of this proposal. Credit unions believe it is critical that NCUA effectively consider and incorporate industry input to ensure that an appropriate risk-based capital regime is adopted for the credit union industry. In the best interests of all stakeholders, therefore, credit unions urge the NCUA Board to operate in a collaborative manner with the credit union industry and reissue the risk-based capital proposal for comment so that we may have the necessary opportunity to raise concerns and suggestions. Doing so, even if not required by the APA, would be good policy for the agency.
Should NCUA's proposal go forward with little or no changes, the new rule would precipitate the need for Congressional action on proposals to bring about capital changes for credit unions such as allowing credit unions to have access to supplemental capital sources. In addition this would prompt the need for statutory changes necessary to design a true risk-based capital system for credit unions. Lastly, a final rule mirroring the proposal in terms of an individual credit union's risk-based capital requirements being changed through the exam process only reinforces the need for action on S. 727, the Financial Institutions Examination Fairness and Reform Act. In such a circumstance, it would also be important for
III. NAFCU's Legislative and Regulatory Approaches for Relief
Regulatory burden is also a top challenge facing all credit unions. While smaller credit unions continue to disappear from the growing burden, all credit unions are finding the current environment challenging. Finding ways to cut-down on burdensome and unnecessary regulatory compliance costs is the only way for credit unions to thrive and continue to provide their member-owners with basic financial services and the exemplary service they need and deserve. It is also a top goal of NAFCU.
Ongoing discussions with NAFCU member credit unions led to the unveiling of NAFCU's "Five Point Plan for Regulatory Relief [attachment C] in
Recognizing that there are a number of outdated regulations and requirements that no longer make sense and need to be modernized or eliminated, NAFCU also compiled and released a document entitled "NAFCU'S Dirty Dozen" [attachment D] in
Our "Five Point Plan" and "Dirty Dozen" outline a number of areas where credit unions need action on both the legislative and regulatory fronts. We urge the Committee to review these documents. In our statement today, we highlight a number of key issues where regulatory burdens and proposals are posing immediate threats to the ability of credit unions to serve their members and give them the financial products that they want.
IV. Pending Bills Before the
There are several measures awaiting action in the
S. 635, The Privacy Notice Modernization Act of 2013
We applaud Senators Brown and Moran for their leadership on this issue. This bipartisan legislation would remove the requirement that financial institutions send redundant paper annual privacy notices if they do not share information and their policies have not changed, provided that they remain accessible elsewhere. These duplicative notices are costly for the financial institution and often confusing for the consumer as well. Similar legislation has passed the House by voice vote and this legislation has over 70 cosponsors in the
S. 2698, The RELIEVE Act
We applaud Senators King, Warner, Tester and Fischer for their leadership in introducing this legislation, a key element of which would provide important relief to credit unions with Interest on Lawyers Trust Accounts (IOLTAs). Maintaining parity between the coverage provided by the
S. 1577, The Mortgage Choice Act of 2013
We applaud Senators Manchin, Johanns,
S.2732, The CFPB Examination and Reporting Threshold Act of 2014 We applaud Senators Toomey and Donnelly for introducing this legislation to address the arbitrary
Relief from the Credit Union MBL Cap
NAFCU supports and urges action on S. 968, the Small Business Lending Enhancement Act of 2013, introduced by Senators
We would also urge Congressional action on legislation to exclude loans made non-owner occupied 1- to 4-family dwelling from the definition of a member business loan. We would urge Congressional action on legislation to exempt loans made to our nation's veterans from the definition of a member business loan. Such a measure can not only help our nation's returning heroes, but also the American economy.
Examination Fairness
Credit unions now face more examiner scrutiny than ever, as the examination cycles for credit unions have gone from 18 months to 12 months since the onset of the financial crisis even though credit union financial conditions continue to improve. Additional exams mean additional staff time and resources to prepare and respond to examiner needs. NAFCU has concerns about the continued use of Documents of Resolution (DOR) when they are not necessary or are used in place of open and honest conversations about examiner concerns. A survey of NAFCU members earlier this year found that nearly 40% of credit unions who received DORs during their last exam felt it was unjustified and nearly 15% of credit unions said their examiners appeared less competent than in the past. NAFCU supports effective exams that are focused on safety and soundness and flow out of clear regulatory directives
New examination fairness provisions should be enacted to help ensure timeliness, clear guidance and an independent appeal process free of examiner retaliation. As outlined earlier, NAFCU supports the bipartisan S. 727, the Financial Institutions Examination Fairness and Reform Act which was introduced on
V. Areas Where Regulators Can Provide Relief to Credit Unions
While my testimony has outlined important issues impacting credit unions and highlighted steps that
NCUA
We are pleased that the
We are also glad to see NCUA's voluntary participation in review of its regulations pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of1996 (EGRPRA). This review provides an important opportunity for credit unions to voice their concerns about outdated, unnecessary or unduly burdensome requirements of NCUA's Rules and Regulations.
Member Business Lending
A major area where we think NCUA can use its authority to provide relief is with member business lending. The Member Business Lending (MBL) regulation, as NAFCU and our members have consistently maintained, is far too restrictive and cumbersome.
As NAFCU outlined in both its
Section 1757a of the FCU Act contains the limitations on MBLs. Under Part 723 of NCUA's Rules and Regulations, the aggregate MBL limit for a credit union is limited to the lesser of 1.75 times the credit union's net worth or 12.25% of the credit union's total assets. However, the FCU Act also contains exceptions to the MBL cap. In particular, it provides exception authority from the MBL cap for "an insured credit union chartered for the purpose of making, or that has a history of primarily making, member business loans to its members (emphasis added), as determined by the Board." See, 12 U.S.C. [Sec.] 1757a(b)(l).
Traditionally, this provision in [Sec.] 1757a has been construed narrowly by NCUA. Section 723.17(c) of NCUA's Rules and Regulations currently defines credit unions that have a history of primarily making member business loans as credit unions that have either 25 percent of their outstanding loans in member business loans or member business loans comprise the largest portion of their loan portfolios, as evidenced by any Call Report or other document filed between 1995 and 1998. NAFCU continues to hear from our members that this definition is overly restrictive and often prevents them from extending sound loans to their small business members, many of whom have been abandoned by other financial institutions due to their smaller size.
NAFCU has urged NCUA to take a broader interpretation of the history of primarily making MBLs provision of the FCU Act. This can be done by NCUA utilizing its statutory authority to create an exception from the MBL cap for all credit unions that have a history of making MBLs for an extended period of time. NAFCU and our members believe that a credit union that has had a successful MBL program in place for a period of five years or greater would be a reasonable basis to satisfy this statutory authority.
NCUA has explained that the current definition "focuses on a credit union's historical behavior during the years leading up to the enactment of the Credit Union Membership Access Act (CUMAA)." NAFCU and our members believe this focus is unnecessarily restrictive, and we have urged the agency to expand the scope of the definition. NAFCU contends that it would be more appropriate for NCUA to consider a credit union's history of making MBLs in general, rather than restricting its focus solely to a credit union's behavior from 1995 through 1998. In particular, we believe the agency should define credit unions that have had a successful MBL program in place for at least five years as having a "history of primarily making MBLs." NAFCU has encouraged the NCUA Board to set this standard and make the exception available to all credit unions.
NCUA expanding the opportunities for credit unions to obtain waivers is another area where they could help. In
While waivers should not be used so frequently that they are the norm, the process to obtain one should not be so excessively difficult as to prevent credit unions from serving their membership effectively. Healthy, well-run credit unions with risk focused MBL programs that maintain appropriate policies and procedures and that perform adequate due diligence on their member borrowers should be able to apply for and obtain blanket waivers which would help their membership.
Furthermore, the MBL regulations should be amended to expand a credit union's ability to obtain an individual or blanket waiver. Credit unions, because of their fundamental nature, are in a great position to extend credit to small businesses which will help fuel our nation's economic recovery. Expansion of the waiver capabilities would enable well run credit unions to extend loans to their small business members.
As noted above, the FCU Act contains the limitations on and exceptions to MBLs. However, the FCU Act does not prescribe limitations on the waivers that NCUA can put in place with regard to the regulations it imposes for MBLs that are not statutory requirements.
Section 723.10 of NCUA's Rules and Regulations contains an enumerated list of MBL related requirements for which a credit union can apply for a waiver. NAFCU believes that this enumerated list of available waivers should be replaced with a more flexible waiver provision that would allow a credit union to apply for, and obtain, a waiver from a non-statutorily required MBL regulatory requirement. The use of an enumerated list necessarily restricts a credit union from obtaining a waiver of a requirement which is not listed, even where such a waiver would not pose a safety and soundness concern to the credit union. NAFCU encourages NCUA to amend Section 723.10 to provide a more flexible waiver provision.
NCUA could issue appropriate guidance for the types of waivers that a credit union could obtain using a more flexible standard, which could include enumerated lists and appropriate examples. Section 723.11 of NCUA's Rules and Regulations contains the procedural requirements for a credit union to obtain a waiver, and it requires a credit union to submit a waiver request accompanied by a great deal of information related to the credit union's member business loan program. Under a more flexible provision, and taking into account safety and soundness considerations, NCUA should be able to determine from the information required to be provided pursuant to Section 723.11 whether a waiver is appropriate for a credit union. This approach would enhance a credit union's ability to provide MBLs to its members without compromising the safety and soundness of the credit union.
Advertising
Another area where NCUA could provide relief would be to amend its Rules and Regulations to accommodate for the rise of social media and mobile banking. Regulations governing advertising, such as 12 CFR 740.5, for example, contain requirements that are impossible to apply to social media and mobile banking, especially medias that are interactive. These rules should be amended with the use of social media and mobile banking in mind to include more flexibility as opposed to the rigidity of the current rules. Credit unions have fared very well in safely adopting the use of such technology, and they take actions necessary to ensure their policies and procedures provide oversight and controls with regard to the risk associated by social media activities. A modernization of these rules by NCUA would clear up ambiguity and help credit unions use new technologies to better meet the needs of their members.
Budget Transparency
NCUA is funded by the credit unions it supervises. Each year, credit unions are assessed a different operating fee based on asset size. NCUA then pools the monies it receives from credit unions and uses those funds to create and manage an examination program. The monies that NCUA collects, however, have significantly increased over the past six years to cover a
NAFCU supports the agency's efforts to accurately calculate the appropriate overhead transfer rate and urges NCUA to maintain a rate that is equitable to FCUs given they are funding the remaining agency expenses through operating fees. NAFCU encourages NCUA to continue to look for ways to decrease costs in order to reduce fees FCUs pay to the agency. In connection with this, NAFCU believes that credit unions deserve clearer disclosures of how the fees they pay the agency are managed.
As NAFCU has stated in previous communications to the agency, NCUA is charged by
Because these funds are fully supported by credit union assets, NAFCU and our members strongly believe that credit unions are entitled to know how each fund is being managed. Currently, NCUA publicly releases general financial statements and aggregated balance sheets for each fund. However, the agency does not provide non-aggregated breakdowns of the components that go into the expenditures from the funds. Although NCUA releases a plethora of public information on the general financial condition of the funds, NAFCU urges the agency to fully disclose the amounts disbursed and allocated for each fund. For example, NAFCU and our members believe that NCUA should be transparent about how the monies transferred from the NCUSIF through the overhead transfer rate are allocated to the NCUA Operating Budget.
We would also like to acknowledge efforts by the
Exemption Authority
One area where the
As NAFCU outlined in its "Dirty Dozen" list of regulations to eliminate or amend in order to better serve credit union customers, the requirement to disclose account numbers on periodic statements should be amended in order to protect the privacy and security of consumers.
Under Regulation E, credit unions are currently required to list a member's full account number on every periodic statement sent to the member for their share accounts. Placing both the consumer's full name and full account number on the same document puts a consumer at great risk for possible fraud or identity theft. We strongly urge you to update the language of Regulation E to allow for truncated account numbers to be used on member's periodic statements.
NAFCU encourages the
Compromised accounts are not only dangerous for consumers, but can be extremely costly for credit unions. In the past year alone data breaches have cost the credit union industry millions of dollars. According to feedback from our member credit unions, in 2013 each credit union on average experienced
As the recent high-profile data breaches at some of our nation's largest retailers have highlighted, criminals are willing to go to great extremes to obtain consumer's sensitive financial information.
Credit unions understand the importance of steadfastly protecting their member's confidential account information, which is why we strongly suggest this regulatory update.
Until
NAFCU has long encouraged the Federal Reserve to update Regulation D. This issue is also on NAFCU's "Dirty Dozen" list. Regulation D generally imposes reserve requirements on depository institutions with transaction accounts or nonpersonal time deposits, and requires reporting to the Federal Reserve. The regulation aims to facilitate monetary policy and ensure sufficient liquidity in the financial system. It requires credit unions to reserve against transaction accounts, but not against savings accounts and time deposits.
NAFCU believes the
FHFA
On
Credit union membership in federal home loan banks (FHLBs) has been increasing, and, as of
VI. Regulatory Coordination is also Needed
With numerous new rulemakings coming from regulators, coordination between the agencies is more important than ever.
NAFCU has been on the forefront encouraging the FSOC regulators to fulfill their Dodd-Frank mandated duty to facilitate rule coordination. This duty includes facilitating information sharing and coordination among the member agencies of domestic financial services policy development, rulemaking, examinations, reporting requirements and enforcement actions. Through this role, the FSOC is effectively charged with ameliorating weaknesses within the regulatory structure and promoting a safer and more stable system. It is extremely important to credit unions for our industry's copious regulators to coordinate with each other to help mitigate regulatory burden. We urge
Data Security
Outside of advocating for federal legislation with regard to the safekeeping of information and breach notification requirements for our nation's retailers, NAFCU has also urged regulatory coordination for credit unions already in compliance with the stringent standards in the Gramm-Leach-Bliley Act. In the wake of the massive Target data breach in
VII. Conclusion: All Credit Unions Need Regulatory Relief
The growing regulatory burden on credit unions is the top challenge facing the industry today and credit unions are saying "enough is enough" when it comes to the overregulation of the industry. All credit unions are being impacted regardless of asset size.. This burden has been especially damaging to smaller institutions that are disappearing at an alarming rate. The number of credit unions continues to decline, as the compliance requirements in a post Dodd-Frank environment have grown to a tipping point where it is hard for many smaller institutions to survive. Those that do are forced to cut back their service to members due to increased compliance costs.
Credit unions want to continue to aid in the economic recovery, but are being stymied by this overregulation. NAFCU appreciates the Committee holding this hearing today. Moving forward, we would urge the Committee to act on credit union relief measures pending before the
We thank you for the opportunity to share our thoughts with you today. I welcome any questions you might have.
Read this original document at: http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=15b3170a-f4a7-4488-876e-87701e05dfcc
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