POST-GAC ANALYSIS – THE YEAR OF GAC CHAGRIN REGARDING REGULATORY OVERREACH

Having just returned from almost a week in Washington at the 2024 Governmental Affairs Conference sponsored by America’s Credit Unions, we wanted to share with you some of our observations and the things we learned during GAC week.

First, the attendance was outstanding at over 6000 attendees.  This response is a credit to the leadership of CUNA and NAFCU that pulled off an associational merger that many thought would never happen in their lifetimes.  The success of the 2024 GAC speaks to the positive response of the credit union community to the merger, and all of the feedback we received about the conference itself was upbeat.

This was an excellent first GAC for the combined America’s Credit Unions and hopefully will be a precursor of more credit unions hiking the Hill in years to come during future GACs.

Now, for what was not positive.  The topic number one in almost every conversation was the chagrin credit unions are feeling about the regulatory overreach by NCUA and CFPB – as well as the supervisory excesses coming through recent examinations.

The length, scope and size of exam teams from NCUA was noted by almost every credit union we spoke with.  The exam teams are larger than ever before, and those examiners are staying engaged with the credit union for a much longer period of time.  Between off-site time in preparation for the exam and the actual time the examination team stays on-site, the average exam is exceeding six weeks for most credit unions.

In addition, the number of separate Fair Lending Exams by NCUA has dramatically increased.  And, to this date, we have not had a single credit union client of ours that has not had multiple findings in their Fair Lending Exams and most have had a Document of Resolution (DOR).

The frustration of trying to prove a negative – that is, the credit union does not discriminate and is an equal opportunity lender – has led credit union leaders to feel very strongly that the Fair Lending Exam has become a cudgel with which to bash every credit union and to try to drive some type of quota-fication of credit union lending programs.  This is particularly true in the mortgage arena, but it is showing itself in consumer and commercial lending findings as well.

But, beyond the frustrations over the scope of exams these days, real concerns about regulatory overreach that will dramatically impact non-interest income were the topic of just about every conversation.

This concern was exacerbated during the GAC when the CFPB announced their final rule on credit card late payment fees capping those fees at $8 monthly.

Not only was this federal agency price fixing a concern because of its effect on credit card payments, but the biggest fear was that the CFPB coming down on the side of a specific $8 maximum credit card late fee was likely a precursor of a similar $8 maximum overdraft fee when the CFPB finalizes its recently proposed overdraft fee rule.

An $8 maximum overdraft fee will essentially end overdraft programs as we know them.  Credit unions will suffer dramatic non-interest income loss that will have to be made up in either interest rates charged on loans (capped at 18% for federal credit unions), lower dividends for credit union depositors and/or the end of free checking for most members.

In other words, in the name of consumer protection, it is almost certain that the CFPB is about to cost the consumers more in interest payments, less in earnings on their deposits and additional fees on other products.

At the same time, the CFPB is going to drive millions of American consumers to payday lenders and check cashing outlets when they lose their overdraft privilege programs that they voluntarily opted into in writing, understand its terms, accept its costs as a convenience fee to keep their check or debit from being rejected when they need it most, and rate the program a very highly appreciated service from their financial institution.

It is literally amazing that a consumer oriented federal agency like the CFPB can so miss consumer practice and preference in the name of eliminating what their affluent federal employee idealogues have determined is a “junk fee” because they never have to live paycheck to paycheck and need it when they run out of money before they run out of month.

CFPB will, in our prediction, lose great credibility with the American consumer when debit cards for the family groceries start being denied and checks to pay the rent and utilities start to bounce.

And it seems almost certain, from the comments made by NCUA Chairman Todd Harper during his GAC presentation, that he will be proposing to the NCUA Board – of which he now has a solid 2-1 majority that shares his consumer protection overreach approach – a NCUA version of the CFPB’s overdraft rule for all credit unions.

As you are aware, the CFPB’s current proposal only specifically applies to financial institutions with over $10 billion in assets.  However, the almost certain NCUA follow-up regulation will likely apply that same CFPB standard to credit unions below $10 billion in assets – in other words, all credit unions.

In fact, just as the CFPB is essentially already enforcing their not-yet-finalized official overdraft rule through their examination process, NCUA examiners seem to be doing the same thing.  We heard from many credit unions that have had their exam teams digging deep into their overdraft programs even without the benefit of a regulation to enforce.

The outcome of this obsession with overdraft fees by both CFPB and, from that, on down to the NCUA will have a number of dramatic impacts.

First, it will cost most credit unions either their largest or second largest source of non-interest income.  Debit interchange revenue (also under attack in Congress) is the largest source of non-interest income for most credit unions.  Overdraft fees are normally the second most productive from a revenue perspective, followed by mortgage origination fees and CUSO investments in that order, in most cases.

The loss of most, if not all, overdraft income – coupled with interest rate driven reductions in mortgage originations – will put more and more pressure on credit unions to drive consumer loan income, reduce dividends and seek other sources for fee income.

Everyone we spoke with at the GAC was greatly troubled by the likely loss of this income – but, even more so, by the loss of overdraft programs as a member service.

Almost unanimously, the belief is that credit union members without a viable overdraft privilege program will end up using the local payday lender or check casher that is open 24 hours, 7 days a week.  They feel, and we agree, that this CFPB action – followed closely by an almost certain NCUA regulation to mirror its provisions – will be the biggest boon to the alternative lender market in history.  Again, all in the name of consumer protection without recognizing the impact on the consumer who really needs the program by the elites who don’t use the program but have self-righteously proclaimed it a “junk fee.”

One man’s junk is another man’s treasure.  And one bureaucrat’s junk fee is another consumer’s lifeline until the next payday.

Secondly, and perhaps equally as significantly, is the fact that losing this non-interest income will almost certainly drive a tremendous spike upward in the number of credit union mergers.  Interestingly, since just about every NCUA speaker from the chairman on down talks about their love for smaller and minority based credit unions and how they wish there were more of them, the bulk of the inevitable mergers that will come as a result of regulatory overreach eliminating overdraft programs will come from small to moderate credit unions that lack the scale to make up for the losses.

Our projections are that, if the CFPB overdraft rule is finalized as proposed and if NCUA follows suit with their own similar rule for credit unions not covered by the CFPB rule, there will be from 1200 to 1500 credit union mergers between the time the rule is enacted and the year 2030.

The overdraft rules from CFPB and NCUA will do, within five years, what the marketplace has not been able to do due to the innovation and perseverance of smaller to moderate sized credit unions over the past three decades.  It will drive the smaller to moderate sized credit unions, including many minority, community development and faith-based credit unions, into mergers that would not have normally been their choice absent the regulatory compliance hit they will take when these draconian fee income regulations become reality.

NCUA Chairman Harper did not dispel any of these concerns during his very strong remarks at the GAC.  No one can accuse him of being “wishy washy” on the overdraft and non-interest income issue.  He was very clear and resolute in his statements that, as long as he is NCUA Chairman, the agency was going to prioritize overdraft regulation and supervision regardless of the cost to credit unions.

Although in the same remarks he professed his affinity toward smaller and minority credit unions, the consensus among those who reacted to his presentation was that both overdraft elimination and helping smaller credit unions could not co-exist.  Therefore, mergers are coming.  No way around it because scale is the only hope to survive.

In fact, every conversation at GAC about how to possibly make up some of the lost fee income coming down the pike centered around scale.  More checking accounts for more debit swipe fees.  More commercial lending which takes scale to have the expertise and mechanisms to do.  More investment in CUSOs which requires the cash to invest that scale provides.

In other words, every area being discussed for making up lost overdraft fee income is something that is more available to larger credit unions than smaller to moderate sized credit unions.  Again, this attack on fee income is going to be a merger driver like nothing we have seen during the past twenty years when we have already seen over 8000 mergers.

Lastly, one of the great areas of discussion is what the timeline will likely be on these anti-fee regulations and whether there is any political development that might derail them.

Politics is always discussed at the GAC.  That’s nothing new.  But the question of whether there may be a new CFPB Director or NCUA Chairman after the November elections was much discussed.

As this is a 50-50 nation and all polls indicate an extremely close presidential election that will come down to a few thousand votes in a handful of states, no one had – and rightfully so – a solid prediction as to whether a Democrat or a Republican will control the White House in 2025.

It could literally go either way.  The president gets to select the CFPB Director as well as designate who the NCUA Chairman will be.  Tell me who is going to be elected, and I can give you an excellent prediction as to whether these rules are sure things or could be either withdrawn, watered down, or delayed.

But, likewise, because the presidential election is so unpredictable at this stage, it would seem the best course of strategic thinking is to begin serious consideration of how your credit union will deal with these new overdraft – and perhaps other – fee income rules.

Better to have plans for your credit union’s strategy to cope with the revenue loss than to simply sit back and hope for a reprieve from either the election or the courts in the likely event of legal action that follows such far reaching regulation.

As far as timetable goes, we would guess that the CFPB will have its final overdraft rule ready to be approved by the end of 2024 with an effective date around mid-2005.  Again, this would apply to financial institutions above $10 billion in assets.

Once the CFPB rule is finalized, our prediction is that the NCUA Board will have a mirror version of an overdraft regulation ready to propose for public comment by the time the CFPB rule is effective in mid-2025.

With the large number of comments expected, a final NCUA rule would most likely not be approved by the NCUA Board until early 2026.  An effective date of mid to late 2026 is therefore about the earliest that a rule could be finalized that would apply to all credit unions regardless of asset size.

The only thing that could delay those timetables would be either (1) a new president appoints a new CFPB Director and NCUA Chairman that either withdraws or delays the rules or (2) legal action might raise enough questions that an injunction could be issued to delay enforcement of the rules until after all cases are presented and appeals have been heard.

There is no doubt that there will be lawsuits.  Too many dollars are at stake for banks and credit unions alike, so there will be a challenge to the CFPB rule.  Even credit unions that have always been hesitant to sue their regulator will join forces for legal action when NCUA follows the CFPB lead and approves its own rule to apply to all credit unions.

Whether the courts will throw a stumbling block to these rules is anyone’s guess.  As is whether the next president will be a Democrat or a Republican.

A lot in the air right now.  But the topic was first of mind at this year’s GAC.

The general consensus of credit union leaders in Washington this week was “buckle up.”  This time the threat to non-interest income by federal regulators is very, very real.

We will continue to monitor our sources in DC and at the agencies.  And we will keep our Dollar Associates clients up to date through our Client Updates as to what we learn.

Until next time.

Dennis Dollar