7 storylines for credit unions to watch in 2020

January 9, 2020 5:00 AM

Credit unions enter the new year with a higher profile than ever before. Despite continued consolidation, membership is at its highest level ever – and so, arguably, is the industry’s profile in Washington. With all eyes already on the November election, however, credit union advocates will have to fight hard for relevant issues to cut through the noise.

From data security to third-party vendor oversight, pot banking and more, there is plenty that Congress could do in the coming year that would have a wide-ranging impact on the industry lasting long beyond 2020. The bigger question is whether lawmakers in D.C. will be able to work together well enough to get legislation passed and to the president’s desk.

As in recent years, Congress’s inability to move quickly – if at all – puts an added emphasis on the actions of regulators, and the National Credit Union Administration has already outlined a host of topics to be addressed in the coming months that will have a lingering impact, including guidance on bank purchases, capital reforms and more.

There’s also the matter of several pieces of litigation that impact the industry, including an upcoming Supreme Court case examining the constitutionality of the Consumer Financial Protection Bureau and a possible Supreme Court appeal for NCUA’s field-of-membership rule. Individual credit unions may also find themselves wondering if this is the year they may finally be hit with a lawsuit regarding overdraft practices or alleged violations of the Americans with Disabilities Act, both of which have been a major trend for CUs in recent years.

What follows is an outline of some of the major stories the industry will be watching throughout 2020 and beyond.

The Trump factor

With Congress absorbed in an impeachment battle and a presidential primaries about to start, most observers said it’s unlikely much credit union-related legislation will move forward this year.

“I wouldn’t characterize it as a wash or a lost year for credit unions,” said Geoff Bacino, an industry consultant and former member of the National Credit Union Administration board. “I think it’s going to be a lost year for every industry.”

Carrie Hunt, EVP and general counsel at the National Association of Federally-Insured Credit Unions, concurred with that sentiment -- at least to a point.

“I do think in general it’s going to be hard to get oxygen in the room,” she said. And with campaigning increasing as the year goes on, it’s likely the industry may have a limited window in which to accomplish any legislative business – but that’s not as much of a change as it might seem, she added.

“That’s also how things went this year because of House investigator hearings and impeachment issues. It seemed there wasn’t as much time for actually legislating. I think the election exacerbates that, but when push comes to shove if there’s an issue that’s incredibly important, Congress will act on it. We just have to work extra hard to try to be that issue.”

Cliff Rosenthal, a credit union expert and former CEO of the group now known as Inclusiv, echoed that sentiment, adding that the industry will be watching the presidential contest very closely.

“It will presumably mater a great deal to credit unions who wins this election,” he said. “If you have continued deregulatory pressures from a Republican administration, you’ll see movement in that direction. In the extreme other direction … if Elizabeth Warren or Bernie Sanders winds up as president you’re going to see a hard regulatory push. So I think credit unions are going to have baited breath on election eve.”

Will Congress move on data protections?

Despite a common view that Congress won’t get much done for the industry in 2020, many expressed hope that this could finally be the year lawmakers move forward on legislation surrounding data security and data standards.

With the California Consumer Privacy Act having taken effect and some states already unveiling their own legislation modeled after it, “we think [data security and data privacy] will continue to be a big issue that Congress will want to tackle,” said Ryan Donovan, chief advocacy officer at the Credit Union National Association. “And frankly, we’re going to see more movement and 2019 was a good year for that issue…A couple of weeks ago, we saw what was the first piece of meaningful legislation introduced that includes not just the data privacy component, but also the data security standard that all entities will have to follow. So that’s progress in the advocacy realm.”

Bacino was less optimistic that Congress would move on the issue. That’s unfortunate, he added, because it’s one of the few areas where banks and credit unions are on the same page.

One related issue that’s not likely to move forward this year, he added, is discussion draft legislation from last fall that would give NCUA and the Federal Housing Finance Agency third-party vendor oversight for cybersecurity protections. The bulk of the industry has opposed that for years, and while regulators continue to request those additional powers from Congress, Bacino said it’s unlikely that issue will go anywhere in 2020.

Pot banking on pause?

Credit unions had hoped for more clarity on pot banking by 2020 and Sen. Mike Crapo’s announcement in December that he would not support the SAFE Banking Act has thrown many in the industry for a loop with no clear path forward.

And some aren’t expecting that to change anytime soon.

“With it being an election year, there’s probably not a lot that is going to happen,” suggested Lucy Ito, president and CEO of the National Association of State Credit Union Supervisors.

While the SAFE Act and other pieces of legislation continue to languish in Congress, NASCUS and other trade groups continue to push for movement, but many say it’s unlikely the issue will get much traction this year.

“With [the SAFE Act} and other safe harbor bills out there, we’d be very much in favor of seeing legislation passed that provides a safe harbor for credit unions and other financial institutions that serve cannabis businesses that are legal under state law,” added Ito.

Bacino, however, suggested Senate Majority Leader Mitch McConnell could have a role as a potential kingmaker if he can cut a deal with Crapo to move the issue forward in order to help Sen. Cory Gardner (R-Col.) take credit for it “so he can take it back home as a campaign issue, because there are a lot of people back home in Colorado who are looking to him to help on this issue” – a move that could help Gardner’s reelection prospects.

NCUA to move on capital

With Congress essentially at a stand-still, many will be watching to see how the National Credit Union Administration moves forward on key issues to the industry.

Along with forthcoming guidance on credit unions buying banks, most expect the agency to unveil new proposals related to capital early in the year.

"Supplemental capital through subordinated debt authorization for low-income designated credit unions – including the ability for all credit unions to apply subordinated debt to their risk-based capital ratio – should be a 2020 regulatory priority,” said Dennis Dollar, a credit union consultant and former NCUA chairman. “This is an important issue for the future of credit unions as the ability to raise additional capital, even if it is structured as tier-one and tier-two capital, will further protect the [National Credit Union Share Insurance Fund] at the same time it is enabling growth-oriented credit unions to finance many of their strategic growth initiatives through subordinated debt and not by tapping into their retained earnings. It is a win-win for the regulator and the regulated – although it is certain to be the next source of a banker delay-and-further-delay strategy.”

Growth, consolidation and conversions

One issue some are watching not just for 2020 but for the coming decade is how ongoing consolidation trends play out.

“The consolidation is irrevocable and I believe along with others that five to 10 year from now there will be 3,000 or so credit unions” compared to about 5,000 today, noted Rosenthal.

He added that additional state league consolidation is also likely in the cards.

“It makes perfect sense to the degree that the underlying credit union movement has been consolidating and here’s less capacity for overhead in terms of [league] dues and so forth,” he noted”

But Rosenthal said the trend of credit unions buying banks – which many expect to continue in 2020 – could also be flipped before long.

“I’m waiting for one of the giant credit unions to convert,” he said. “I don’t know the Navy Federal folks on the inside, but they’re touching $100 billion, which doesn’t make them a large bank but certainly gives them the capacity to convert if they want to do that.”

If any large credit union were to convert away from a credit union charter, posited Rosenthal, it could have long-term effects on the entire movement.

“This would be beyond one shoe falling if some of the very large credit unions leave the system,” he said. “The unified system or movement is fraying in that sense in terms of the politics and the structures, and I don’t know whether that can be re-mended or woven back together again.”

Supreme Court cases

2020 could be a big year for legal issues at credit unions, and it won’t take long for the fireworks to start.

The industry’s relationship with the Consumer Financial Protection Bureau has changed dramatically over the last several years, and many in the movement have advocated – regardless of how the bureau treats credit unions – that the CFPB needs a different leadership structure. Most have suggested a bipartisan panel rather than a single presidential-appointed director, but those opinions aren’t universally held. Regardless, the Supreme Court is scheduled to hear a case in March considering the bureau’s constitutionality, and credit unions will be watching the result closely.

It’s currently unclear whether the American Bankers Association intends to appeal a lower court’s ruling on NCUA’s controversial field-of-membership rule.

“There’s been a lot of discussion about the Chevron doctrine and whether agencies should continue to get as much deference as they do,” said NAFCU’s Hunt. “Lots of groups would love a Chevron case to be taken up by the court. I don’t think the fact pattern with the NCUA case is the best one to overturn the Chevron doctrine…but that doesn’t mean the bankers won’t try. It’s pretty easy to throw together a request for cert and I don’t think they have a lot to lose.”

If ABA appeals and the court accepts the case, most sources said it’s likely the matter won’t be considered until its next session begins in October.

Regardless of any moves ABA makes, Dollar said the time for NCUA to implement those rules is now.

"From a regulatory perspective, credit unions should work with NCUA to see that the 2016 federal field of membership rules are implemented efficiently,” he said. “he federal charter is at a disadvantage to the charter in many states, primarily because of field of membership restrictions. To keep the federal charter competitive and retain balance in the dual chartering system, the NCUA rules – now nearing four years since they were enacted – need to be implemented completely and constructively in the quickest manner possible to help FCUs have more modernizing FOM options. The FCUs have been waiting since 2016 and need the diversification options that these new rules will provide them."

More suits targeting CUs?

Two of the biggest issues for credit unions in recent years have been the ongoing spate of lawsuits targeting credit unions for alleged violations of the Americans with Disabilities Act and class action suits related to overdraft policies. While neither is expected to disappear completely in the year ahead, things may have at least temporarily quieted down.

“We haven’t necessarily seen a slowdown in overdraft litigation, though I’m not going to say we’ve seen an uptick either,” said NAFCU’s Hunt. She noted that one particular law firm that tended to target credit unions on that front may have moved on, but there is still a possibility these could continue.

ADA suits, on the other hand, have seen a definite slow down, she said.

“I think us pushing back on these cases and fighting back on the issue of standing is helpful,” she said. “For certain plaintiffs’ counsel it’s easier to sue other entities that don’t have that [field of membership eligibility] barrier to bring that lawsuit.”

What could help solve the problem in 2020, said Hunt and others, is if the Department of Justice finally moves forward with guidance for CUs and other industries facing these suits. Multiple industry groups have met with DOJ officials on the matter but no concrete progress has yet been made.