Credit unions are worried that the revulsion arising from Wells Fargo's illegal practices may spell doom for any hopes of regulatory and compliance scale-backs, and structural reforms at the Consumer Financial Protection Bureau and other government regulators.
Democratic politicians already have their knives sharpened.
"We need to look no further than just last week to see why we need a strong Consumer Financial Protection Bureau, which used its authorities under Dodd-Frank to uncover a massive scheme under which millions of consumer accounts at Wells Fargo were fraudulently opened, with the bulk of this fraud perpetrated in my hometown of Los Angeles," said Rep. Maxine Waters, D-Calif., of the House Financial Services Committee, during last week's markup hearing on the Financial Choice Act.
U.S. Sen. Elizabeth Warren (D-Mass.) called for strict punishments for Wells CEO John Stumpf when he testified before Congress.
"You should resign, you should give back the money you took while this scam went on, and you should be investigated by the Justice Department and the Securities and Exchange Commission," Warren told Stumpf at the hearing.
Given that the compliance and regulatory rules enforced by government agencies such as the CFPB impact both credit unions and banks, there are concerns among CU observers that the fallout from the Wells Fargo scandal could make regulators even more reluctant to scale back how financial institutions are overseen.
Indeed, the CFPB and Dodd-Frank Financial Reform Act were formed in response to the huge malfeasance perpetrated by the banks during the economic crisis of 2007-2008 – but credit unions have unjustly suffered from increased legislative scrutiny.
Dennis Bromley, SVP of member development and engagement at West Jordan, Utah-based Mountain America CU noted that while the Wells Fargo fiasco is a big news story today, the bigger concern is that if large financial institutions continue to take advantage of consumers then "we will all have to pay the price."
Roy MacKinnon, president and CEO at Edwards Federal Credit Union in Edwards, Calif. echoed that sentiment. The fallout and public revulsion over Wells-Fargo's tactics, he suggested, could spill over into the credit union movement in the form of government intransigence on repealing ornery regulations.
"It will definitely make it more challenging for us on that front," he said. "On the other hand, the scandal surrounding Wells Fargo may make more of the public see how different credit unions are from the big banks."
Indeed, much of the significant growth credit unions have experienced during the last five years was launched by lingering resentment toward the big banks following the financial crisis, and spurred on by Bank of America's 2011 attempt to introduce a $5 fee for customers to access their own money. That led to the creation of Bank Transfer Day, which was the catalyst for millions of Americans converting from bank customers to credit union members.
Some CUs are even using the fiasco as an opportunity to remind members – and potential members – about the value of the credit union difference. State Emplyees' CU in Raleigh, N.C. reminded in a statement that employees are only paid a salary and receive no incentives or commission-based compensation.
"This structure intentionally removes any temptation which might distract the focus of providing members the most appropriate products, allowing staff to fully focus on helping members improve their financial lives," SECU said.
Silver Linings?
But Mia Perez, chief administrative officer at Louisiana Federal Credit Union, doesn't see a direct correlation between the scandal at Wells Fargo and the likelihood of credit unions seeing reforms at CFPB. Still she concedes that, "overall, this behavior doesn't help the reputation of financial institutions in general."
John McKechnie, a partner at Total Spectrum and former official at CUNA and NCUA, sees some silver linings for credit unions. "I see this situation playing to the advantage of credit unions in a number of ways," he said. "Legislatively, there is now an even more powerful argument that Congress should reform and modernize the way credit unions serve the marketplace."
The question now is what will credit unions do in response. "From a pure advocacy standpoint, the job for the credit union lobby will be to make sure policymakers see the difference between the cooperative, positive way in which credit unions help the consumer versus the way banks unfortunately choose to take advantage of them," McKechnie pointed out.
And on the regulatory side of the equation, McKechnie indicated, a case can be made that CFPB and bank regulators "should devote more time than ever to policing a banking industry that clearly needs policing."
"Credit unions have been telling CFPB that it should devote its time and energy to the bad actors, and let credit unions do their thing," he noted. "The Wells fiasco makes that point pretty persuasively."
Perez said that the "sheer magnitude" of this problem at Wells Fargo – coupled with the fact that their senior executives are in the headlines for exorbitant payouts – infuriates the everyday consumer. "Credit unions can leverage the fact that there are no paid stockholders or paid board members in our not-for-profit model," she said. "Credit unions are run by volunteers [that are] representative of the membership."
She added that Louisiana FCU has used social media channels to share the headlines about Wells Fargo "to remind our members and future members that credit unions are a viable banking alternative."
But Dennis Dollar, an Alabama-based credit union consultant and a former NCUA chairman, said he thinks the CFPB will use the Wells Fargo fiasco for its own political advantage – "even though [the fraud] would have almost certainly been discovered by the OCC [Office of the Comptroller of the Currency] or FDIC … because it was so egregious."
Dollar also said that the CFPB will "play it heroically," as though it is the only governmental regulator that could have been astute enough to uncover a nationwide fraud scheme with more than 5,000 employees involved.
"Preening about imposing tough penalties – even when it is well deserved, as with the Wells Fargo case – for a regulator is smart inside-the-Beltway politics, because we must realize news headlines are read by Congress as well," Dollar said. "It is a winning political issue for CFPB, no question. The CFPB will accuse any congressman or candidate that wants to see some more needed accountability in their operation, whether it be something as reasonable as a five-member board to oversee policy or the requirement to have their budget go before elected representatives, of being in the pocket of abusers like Wells Fargo. The CFPB will ride this horse hard."
