Regulation Continues to Expand in Credit Union Land: The Dodd-Frank Act Brings a New Regulatory Regime

Dennis Dollar’s perspective on the latest regulations designed to protect consumers from another “too big to fail” financial industry debacle.

In July, President Obama signed into law the Dodd-Frank Act, designed to put in place a regulatory regime that will protect consumers from what have been described as “excesses” in the banking industry and to prevent another “too big to fail” financial industry debacle.  While the new law is perhaps well intentioned, it will have dramatic impact on financial institutions – including credit unions – for years to come. 

There will be new regulations imposed by the new Consumer Financial Protection Bureau (CFPB) and, although the new Bureau will only enforce its new regulations on financial institutions with assets in excess of $10 billion, the NCUA and state regulators will be charged with enforcing those new regulations on all credit unions.

The establishment of a new federal authority with extremely far reaching powers is troublesome to many credit unions.  And this new authority’s very existence is based upon a congressionally sponsored belief that every problem in the financial arena can be solved with a new regulation. It will add costly regulatory burden, increase compliance pressure and impact income sources such as interchange revenue and possibly overdraft income.  It could drive an increased number of credit union mergers because of inability to effectively comply with some or all of the new regulations.

In addressing the nation’s financial troubles, the Act seems to be quite hostile to any marketplace consideration.  In fact, I believe it can be fairly said that the Act is so tied to fulfilling a “make them pay” agenda against the financial industry that it ignores the potential impact on credit availability, an economy in peril for lack of growth, a struggling financial sector and even consumer costs going forward.

While credit unions were not the culprits in the current financial industry debacle, we are being forced to pay a serious price for the sins of others. 

Never in history has a nation been able to regulate itself out of financial crisis.  A nation must grow itself out of financial crisis.  No one has effectively demonstrated how this legislation will make any measurable contribution to growing our nation into increased availability of credit, stronger financial stability or more job creation – unless someone is seeking a career as a federal regulator.  In that case, their future may be bright.  Otherwise, this law could kill more jobs than it creates by a thousand fold.

This was bad legislation before the costly interchange amendment was added in the Senate.  When the interchange amendment was added to an already overreaching bill, it went from a “merely bad” bill to a “sincerely bad” bill overnight.  There was absolutely no additional consumer benefit achieved whatsoever.  The interchange amendment was nothing but special interest legislation thinly disguised as consumerism so that it could be attached as a rider to this “consumer” bill – and the disguise is virtually invisible. 

To date, no one has been able to validate how American consumers will gain a single penny from the interchange amendment, but it is clear that the financial institutions carrying all of the risk with debit cards will lose out big time.  The cost of that debit card risk will inevitably fall to the consumer in the form of some other fee while Target and Home Depot laugh all the way to the same struggling financial institutions they just stuck with the bill.

While there are certainly some needed reforms in this bill, those areas of focus could have been accomplished with a much less overreaching approach.  Its sponsors in Congress tell us that we are over-reacting and the new financial regulatory agency created by the legislation will be balanced and those who are doing right by the consumer will have nothing to worry about. 

While trying to create what they portray as a regulatory gentle giant that should not strike fear in the hearts of financial institutions, it is quite possible that Congress has instead created a new regulatory Frankenstein.  The monster could end up killing off every other nearby agency in its path.  It may even undermine the well-intentioned designs of its creators by stalling much of the innovation needed for economic growth through expansion of credit in this country by the only folks who can grow credit availability – financial institutions applying solid marketplace principles with appropriately managed and balanced risk.

Although it will unquestionably be a credit killer, everyone wants to believe that this legislation was a well-intentioned attempt to curtail the abuses that the big Wall Street players like AIG and Goldman Sachs exemplified in the last few years.  But it became so much more than that, and the result will have a lasting impact on financial institutions and the American consumer in need of credit.

This new consumer protection bureau will go beyond merely usurping regulatory authority from NCUA and other state and federal regulators. It could someday soon also become the foundation upon which the home of a single financial regulator is built, eventually merging NCUA, FDIC, OCC and other regulators into a homogenous ‘one size fits all’ regulator that will not serve credit unions well.

I hope we don’t look back on this legislation as the beginning of the end for specialized regulators like NCUA, OCC and state regulators.  I’ll gladly admit I’m wrong if this does not create a super-regulator that swallows other federal and state regulators over the next ten years, but I have real concerns at this early stage as to where this new law could lead. 

Dennis Dollar is principal partner in a full service credit union industry consulting firm, Dollar Associates LLC, former Chairman of the National Credit Union Administration, award winning credit union CEO and two-term state legislator from his home state of Mississippi. He will be a Breakout and Closing General Session speaker at the 2010 Convention and Annual Business Meeting. To register or for more information visit the Washington Credit Union League’s Convention Website.