There is intense debate about the Consumer Financial Protection Bureau’s future. Recent court rulings have called into question the constitutionality of the agency. The agency’s funding mechanism is in the cross hairs as some lawmakers seek to move funding away from the Fed and into appropriations. The credit union system continues to urge the CFPB director to use exemption authority for credit unions where appropriate, while the director believes he does not have that express authority. Just this week the Senate Banking Committee discussed the potential to exempt institutions under $10 billion from the CFPB to give much-needed relief.
While these are vital structural and power issues, there is one CPFB reg that goes into effect in 2018 that will cost credit unions million of dollars and countless hours of compliance burden that is an example of where the CFPB can do much better for community financial institutions. The agency’s new HMDA reg not only adds additional reporting fields to the traditional HMDA reporting on first mortgages that goes beyond what was required by Dodd-Frank, but it also, for the first time ever, requires institutions to report HELOCs under HMDA.
The HMDA issue may seem inconsequential compared to the more holistic questions about CFPB’s structure, funding, and exemption authority, but in many ways the HMDA issue is the very reason those other issues are even being debated. Why? It is a reg that will more adversely impact smaller, community institutions, the very institutions that the CFPB and its proponents have been saying they want to see thrive under the new regulatory environment. It is a reg that is looking to solve a problem that didn’t exist in the credit union community.
It is also the quintessential example of where the CFPB could have set credit unions and community banks apart from the larger players by establishing reasonable loan thresholds for falling under the new reg. Instead, it set a very low threshold of 100 loans in a 12-month period as the target for falling under the regulation. That low level is not consistent with the intent of CFPB to be a watchdog for the largest of institutions and to rein in the industry’s bad actors. It’s reminiscent of the 100 international remittances threshold the CFPB set for new regs in that area that ultimately pushed many small and mid-sized credit unions out of that business.
If you are a small to mid-size credit union originating just over the 100 HELOC threshold each year, you will now have to revamp your HELOC loan processes to report HMDA data. Most credit unions originate HELOCs free of charge to the member and the member experience is a very simple, short application process. The application process will change at many credit unions when this reg goes into effect, likely resulting in a longer, more burdensome application process for members.
Putting the member experience aside, the cost to credit unions and the added compliance burden will be significant. Many small and mid-size credit unions — and even some large ones —do not currently have a system in place to pull HMDA data for HELOCs. They are likely fulfilling HELOCs on a consumer loan platform that cannot handle HMDA requirements. This reg will force those credit unions to invest in a mortgage origination system or some other add-on solution to pull from the consumer platform. It is important to note that one reason many small and mid-sized credit unions do not have mortgage origination platforms in-house is because they outsource that origination to CUSOs and other firms serving credit unions. Those outsourced relationships are cost effective to credit unions and allow them to offer low-cost products to members. Requiring credit unions to have more of these systems in-house minimizes the benefits of the CUSO model or outsourcing to the vendor community.
The good news is that the CFPB has shown in the past that it is willing to go back and revise its original thresholds for reporting, such as it did for small lenders for the Qualified Mortgage reg. The bad news is that a revision approach won’t work with HMDA and the credit union system has communicated that to the CFPB time and time again.
Credit unions will have to make system investments very soon to comply with the rule going into effect in 2018. If the CFPB adjusts the loan threshold after the rule is in effect, credit unions would have already spent the time and money to comply with the new rule.
We all know the CFPB craves data and surely their internal data professionals will relish the opportunity to crunch HELOC data to do analyses. But clearly credit union and community bank data isn’t key to that. By just looking at the top 10 HELOC originators nationwide, the CFPB would have the statistical snapshot it is looking for on HELOC lending.
The reason for including HELOC data is also not clear. HMDA was created to prevent red-lining in mortgage lending. Credit unions were never part of that. Further, HELOCs don’t look or act like the mortgage loans that HMDA was created to monitor. HELOCs are in many ways the new version of the personal loan at credit unions. The core uses for HELOCs are for education costs, home improvement, and to pay off other consumer debt. HELOCs are one of the best forms of credit a member can access in terms of cost and ability to receive tax benefits.
New HMDA reporting requirements don’t garner as many headlines as some of the big questions facing the CFPB, but this is exactly the type of “nuts-and-bolts” compliance burden issue that is causing the CFPB debate.
CUNA and the leagues have been telling CFPB this story for well over a year now. The bureau has heard our calls for relief. It has not compelled the agency to act. It may be time for another key voice on regulatory issues to come into play. The NCUA has prudential regulatory authority over the credit union system. It knows better than anyone that the risk credit unions pose to the financial services industry because of HELOC lending is non-existent.
Acting NCUA Chairman Mark McWatters has shown a willingness to put forth reasonable regulation for the credit union community that does not sacrifice safety and soundness. This reg is not reasonable and it will not enhance safety and soundness. McWatters might just be the one person who can give credit unions the strongest voice on an issue where credit union concerns have largely been ignored by the CFPB.
Paul Gentile is president/CEO of the Cooperative Credit Union Association, representing credit unions in Delaware, Massachusetts, New Hampshire and Rhode Island. He can be reached at pgentile@ccua.org
