MINNEAPOLIS-One analyst is offering some strategies for dealing with the increased regulatory burden every credit union is facing, along with words of caution on compliance risks many may overlook.
Ed Kramer, EVP of regulatory programs for Wolters Kluwer, and a long-time veteran of financial services who has been a public member of the New York State Banking Board, and later Deputy Superintendent of Banks for the State of New York, noted smaller financial institutions-those with $10 billion or less in assets, which includes most CUs-were able to avoid some increased supervision and regulation under the new laws passed in recent months. Yet they still are going to be required to follow more rules than before, he said.
"They won't be able to avoid these, but they can manage the burden with an integrated approach to regulatory challenges," he assessed. "It is important to automate compliance as much as possible. This is difficult for smaller institutions because they don't have the resources, which is where, and I don't want to push our company, but companies such as Wolters Kluwer can help smaller institutions."
What regulators are looking for more and more is for credit unions to be more proactive, Kramer continued. He said regulators expect CUs to look for "weak spots" on their own, but he warned there many opportunities, given the large number of new regulations, to miss compliance.
"Credit unions don't make predatory loans, but if they operate in certain jurisdictions or operate across state lines they have to watch for local predatory lending laws," he advised. "Even though credit unions are cooperatives, there might be some loans that are not made to a person in a protected class, or disparate pricing. There need to be file reviews or automated systems in place to watch for this."
Costs Associated With Compliance
The "difficult part" for nearly every CU is going to be managing compliance-related expenses.
"They need to do as good a job as possible to monitor and comply. If this is integrated into daily workflow it keeps costs low."
One example is a product Kramer said available from a number of companies similar to Wolters Kluwer: it performs a tangible benefits test for any borrower seeking to refinance.
"From the time the loan is originated to the time it is processed, compliance needs to be integrated into the loan," he said. "Many credit unions get indirect loans from auto dealers for a flat fee, so there is less opportunity for disparate pricing. But, if the credit union allows the dealer to mark up a loan by 200 basis points, there needs to be a reason for that."
Credit unions should review their forms and loan processes periodically to make sure every new regulation is being followed, he added.
End Of Free Checking?
Will free checking become a thing of the past at most financial institutions? Kramer acknowledged there has been a great deal of speculation on this topic recently, but said free checking is a way to get customers in, create bonds and deepen the relationship.
"Estimates of Reg E's impact on income vary widely," he said. "The best route for credit unions will be to continue to do what they've always done by providing consumer-friendly products and just muddle through the loss of income that comes. Credit unions will be creative in coming up with programs that reward having more products. Maybe they'll offset some of the lost income due to additional accounts and expanded account relationships."
In any event, Kramer continued, the next several months will continue to be difficult ones for CUs: there are compliance burdens, reductions in fee income and possibly reductions in interchange income, he listed.
"I think credit unions are going to be more aggressive in courting new members in their service areas. The same is happening with community banks, so it is going to be a tough environment for awhile. The key is to start being as efficient as possible. With adversity comes opportunity, and I don't think credit unions shy away from opportunity. Every financial institution is going to struggle with this period of uncertainty."
