SOME OBSERVATIONS SINCE OUR LAST CLIENT UPDATE

Several of you have mentioned when we spoke recently that there have not been many Client Updates in August and September after a flurry of issues brought about several updates in June and July.  Well, that’s pretty much the case each year.

The NCUA Board does not meet in August each year.  Likewise, with Congress out of session in August, other agencies take somewhat of a summer break as well.

Therefore, there is not a lot of legislative or regulatory action in August and, because so many officials are out of pocket in August, September is naturally quiet as well.  This is even more the case in an election year when the Senators and Representatives are back home campaigning any time they are not required to be in Washington – and sometimes even when they should be in Washington.

However, we’ve been taking some notes and thought it might be a good time to provide a handful of observations on recent activity or inactivity and what it might mean as summer turns to fall with elections, budget battles, last minute legislation and regulatory proposals nearing their final stage.

OVERDRAFT FEE ISSUE AT CFPB SEEMS TO HAVE SLOWED, BUT CERTAINLY A FINAL RULE IS STILL VERY LIKELY BEFORE YEAR END

 Even though the CFPB seemed to be on a fast track with their proposed overdraft rule and almost certain to approve it by fall 2024, the expected arrival of their final overdraft rule has not yet materialized.

While we still expect that they will finalize the rule before year end, there are likely several reasons why we are almost to October and no final overdraft rule has been published yet.

First, the comment period was much more active than the CFPB expected.  And, of course, the commenters were overwhelmingly negative on the proposed rule other than a handful of activist consumer organizations that have been pushing such a rule for years.

Not that the CFPB is likely to tone down its proposal because of the outpouring of opposition, but the federal Administrative Procedures Act requires any federal agency to read and respond to – individually or categorically – all comments made during the official comment period.

The more the comments, the longer it takes to process them and, therefore, the longer it takes to get the rule out in final form.

Another factor that is related but is also slowing down the final CFPB rule on overdrafts is the Supreme Court’s repeal of the Chevron Doctrine that was the precedent that courts used to defer to federal agency rules when challenged as long as the rules were not “arbitrary and capricious.”

Now, after Chevron, a lawsuit about a rule enacted by a federal agency will be judged by the courts not as to whether it is “arbitrary or capricious” but instead as to whether it is a “reasonable” interpretation of what Congress meant when it gave authority to the agency.

This is related to the comment period issue because one of the main ways an agency proves that they were not “arbitrary or capricious” when enacting a rule is to show the documentation of the comment period and how the agency listened to the stakeholders.  That is easier to prove, even when an agency reads but disregards the comments, than it will be to prove post-Chevron that it is a reasonable interpretation of an agency’s authority to disregard commenters and expand the agency’s authority beyond the congressional mandate.

For example, on the CFPB’s overdraft rule, the agency is basically price fixing the amount a bank or credit union with more than $10 billion in assets can charge for an overdraft fee.  Now, instead of trying to prove that this action is arbitrary or capricious (which might could have been proven as overreaching as this rule truly is), someone suing the CFPB over the overdraft rule only has to prove that the agency unreasonably interpreted their authority to actually fix prices that Congress did not specifically give them the authority to fix.

With that new legal landscape facing them post-Chevron, the CFPB must take more time to prove and document their reasonableness in interpreting and implementing the authority Congress has given them to actually fix prices that banks and credit unions can charge.  That is, within itself, slowing down this rule from becoming final as quickly as many predicted.

It is absolutely certain that, with the number of dollars involved, there will be a lawsuit over the CFPB’s overdraft rule – just as one has been filed over its late fee charge cap approved earlier this year.  With Chevron protection gone, the CFPB is going to see more and more challenges on their more far-reaching regulations.

The election is also coming into play on the CFPB overdraft rule.  The CFPB is caught between its desire to finalize the rule before the end of the year because, if there is an administration change from the Democrats to the Republicans (impossible to predict today because of the closeness of the polls for this virtually unprecedented election with changing a major party candidate mid-campaign, third party candidates coming and going, assassination attempts, debates and then no debates), the current CFPB Director Rohit Chopra will certainly be replaced if Trump wins the election and most likely retained if Harris wins.

So, that uncertainty within itself will drive the CFPB to want to finalize the rule by the end of the year – although they might wait until 2025 if Harris wins and Chopra is able to stay on as CFPB Director.  Certainly if Trump wins they will proceed with finalizing the rule before the inauguration and likely departure of Chopra.

They have to balance these political factors with the necessity to ensure they have sufficiently documented the rulemaking for the overdraft rule to successfully defend it as a reasonable interpretation of the CFPB’s statutory authority.   Preparing for a post-Chevron challenge is going to be more difficult than when CFPB has approved many earlier regulations while Chevron was still in place before the Supreme Court struck it down.

One more thing on the CFPB overdraft rule, we have predicted that shortly after the CFPB approved its rule that would apply to credit unions with over $10 billion in assets that the NCUA Board under Chairman Harper would move to propose a copy-cat rule for credit unions with less than $10 billion in assets.

While we still believe the political pressure will be strong on Chairman Harper and Ms. Otsaka (the current NCUA Board Democrat majority) to adopt a similar rule for credit unions below the $10 billion asset threshold because consumer advocates will claim that smaller institutions are taking advantage of consumers with “unreasonable” overdraft fees just as much as larger institutions are, Chairman Harper in a sit-down discussion with me several weeks ago at the NCUA headquarters assured me that he has no intentions to propose a copy-cat rule on overdraft fees after the CFPB finalizes theirs.

He indicated that he believes the marketplace itself will drive down overdraft fees for those institutions with $10 billion assets or less when the CFPB rule is implemented and forces down the fees at larger institutions with more than $10 billion assets.  I assured him that I would make my clients aware of his intentions as I commended him for employing a marketplace approach – even though it is a marketplace approach by NCUA reacting to a regulatory overreach by the CFPB.

He is likely correct, however, that whether NCUA enacts a similar overdraft rule (which could still happen due to consumer group pressure despite the chairman’s current intentions) or just allows the market to drive down overdraft fees stemming from the CFPB rule (which is quite likely to be approved by end of year 2024 with an effective date sometime in later 2025), credit unions need to be strategizing now about how they will adapt to this loss of non-interest income.

Even though we continue to believe that it would not be wise to give up significant non-interest income until either regulation or the marketplace forces you to do so and it would be even more unwise to try to predict what the final CFPB rule will look like until it is actually finalized, there is considerable wisdom in at least analyzing from a strategic perspective how your credit union would adapt with additional income sources, account restructuring, possible branch closings, etc. if and when the overdraft fee rules begin to be felt in probably 2026 and 2027.

NCUA BOARD MEETING IN SEPTEMBER WAS SEEMINGLY NOT NEWSWORTHY – EXCEPT IT WAS IF YOU LOOK BELOW THE SURFACE

After no NCUA Board meeting in August, the Board met last Thursday and addressed what the trade press called a lackluster agenda.  The actual regulatory items that were voted upon were indeed only barely newsworthy.  One simplified the wording of NCUSIF share insurance coverage without any changes to qualification or coverage levels, and the other implemented the statutory requirements of the Fair Hiring in Banking Act.

However, also covered at the Board meeting was the quarterly NCUSIF report.  This agenda item required no action, but it was quite revealing if you look behind the scenes at what it may be indicating as it relates to future NCUA Board action.

Chairman Harper went to great lengths to emphasize his deep concerns about how the number of federally insured credit unions with a CAMELS rating of 3, 4 or 5 has increased.  In actuality, the 879 credit unions with 3s, 4s and 5s  is down from 988 at the end of 2019, 907 at the end of 2020 and 881 at the end of 2021.  The number of 3s, 4s and 5s was 891 at the end of 2022 and 901 at the end of last year.

So, as you can see, the number of CAMELS 3, 4 and 5 credit unions is actually down from December 31, 2023.  However, the Chairman emphasized that more assets are in these categories than previously.  Therefore, to him this is a major area of concern that requires great “vigilance” by the agency.

Indeed a case can be made that the beginning of a lower interest rate environment brings about a very important monitoring of cost of funds and margin that must take place at credit unions.  And, yes, NCUA must focus likewise on how credit unions are managing this changing interest rate environment.

Yet, despite the deep concern being expressed by the Chairman, the reality is that credit unions have managed a lower interest rate environment for years.  And they have managed well the higher rate environment of the past two years or so.

NCUA should keep an eye on it, and they are right to do so.  But, in actuality, many of the interest rate risk factors that have been driving lower CAMELS ratings over the past two years will be significantly improved as rates go down.

So, the despair over the growing number of CAMELS 3, 4 and 5 is a bit melodramatic.

But, if you want to see a bigger NCUA examination budget and a higher normal operating level of equity in the NCUSIF, it helps make your case.  And Chairman Harper wants both.

Therefore, watch this figure of increasing CAMELS 3s, 4s and 5s as well as a slight increase in delinquencies which is quite normal in a near recession period of high inflation to become the rallying cry for a larger NCUA budget for 2025.

The NCUA budget for the next year is normally proposed in October and voted upon in November or December.  Be watching for a double digit increase to be proposed.  After all, we’ve got to deal with these rising number of credit unions with CAMELS 3, 4 and 5.

And, hey, we may need to increase the equity level of the NCUSIF that is now in the 1.3% range closer to the 1.5% range so we can have enough buffer in the share insurance fund to cover the possible losses that could come with more CAMELS 3, 4 and 5.

That’s why we say that the trade press labeled the September NCUA Board meeting as somewhat of a snoozer.  No real news, they say.

But we look beyond the public meeting and, with our working knowledge of how NCUA thinks, we can often see key indicators of future action by the discussion that takes place even in the most innocuous question and answer periods at the NCUA Board meetings.

As the 2025 budget is proposed and the normal operating equity level of the NCUSIF is outlined in the next month, be on the lookout for larger budgets and higher equity levels required for the NCUSIF.  The stage has been set by the discussion on the share insurance fund at this past Thursday’s NCUA Board meeting.

Until next time.

Dennis Dollar