(This is the third in a series of article on Cliff Rosenthal’s transition from the National Federation of CDCUs to the CFPB. A version appeared in Credit Union Journal on March 25, 2015.)
In March 2014, I left my job running the Office of Financial Empowerment of the Consumer Financial Protection Bureau. In my earlier two articles in this series, I described my departure from the National Federation of Community Development Credit Unions in 2012, after 32 years, and the culture shock I experienced – for better and for worse – in joining the CFPB. I did not leave the Bureau as any sort of protest, but rather to reunite the two halves of my life – my weekdays in Washington, DC, and my weekends at my real home in Brooklyn, New York, bridged by the 700 hours on Amtrak my wife and I had logged over nearly two years. Back here in Brooklyn, I have begun a third career of consulting and writing. To paraphrase the classic Joni Mitchell song, I’ve looked at regulation from both sides now. I’m a credit union lifer; to this day, I’m advising groups on organizing credit unions. But I value and strongly support the CFPB in its current, though imperfect, form. So, I’m wrestling with this question: What would it take to better align the CFPB and the credit union movement? We can agree that total alignment between the CFPB and the credit union movement is neither realistic nor attainable, even though both are on the consumer’s side. Tension between the regulator and the regulated is inevitable. But as long as it is a creative, constructive tension, it can produce better outcomes for all sides. I continue to believe that this is both desirable and possible.
What CFPB Is… and Isn’t
To review the basics: the CFPB is not a safety-and-soundness regulator. It doesn’t regulate capital standards and can’t put credit unions out of business on those grounds. Its job is to regulate vast, disparate segments of the entire financial industry – not only banks and credit unions, but payday lenders, loan servicers, credit bureaus, and more. This means that all types of businesses weigh in on CFPB regulations. This makes it fundamentally different from NCUA, which primarily deals with the organized credit union movement, and may receive thousands of very similar comments on any given issue. It would be enough for the CFPB to balance regulations for diverse financial businesses. But it’s not only financial providers that weigh in on every CFPB action: the CFPB’s “stakeholders” include sophisticated, well-prepared consumer advocates who meet and communicate regularly with the Bureau. In fact, the CFPB in some measure owes its existence and ongoing support to consumer advocates, many of whom fought long and hard for its creation, and who continue to defend it. In contrast, credit unions were, at best, wary of the creation of the CFPB, if not vigorously opposed. Apart from dealing with diverse, conflicting industries, the CFPB must deal with virtually non-stop attacks by members of Congress. There are continuous efforts to repeal key CFPB regulations; to clip the wings of the Bureau, by replacing the sole director with a politically chosen board; and to bring the CFPB under annual Congressional appropriations (instead of funding by the Federal Reserve System). This hostile political environment makes the CFPB even more cautious and prone to delays in regulatory actions than it might otherwise be – a source of frustration for financial institutions, which typically dislike uncertainty. Add all this altogether, and the CFPB has a very challenging balancing act. This is unlikely to change.
Creating Flexibility for Credit Unions
I don’t think it’s useful for credit unions to wish or work for the elimination of the Bureau. Notwithstanding the Republican control of both houses of Congress, it’s difficult to envision legislation to eliminate the Bureau that would survive a presidential veto, at least through 2016. And as for replacing the sole director with a “bipartisan” board to oversee the Bureau’s activities, that, too, would face an uphill battle – not only from President Obama, but from Senator Elizabeth Warren, the “godmother” of the Bureau and its staunchest supporter. The argument that a five-member commission would provide more “balance” in regulation than the current structure is, I believe, a disingenuous effort to paralyze the Bureau. So, let us stipulate the Bureau will be around in its current form for some time to come. How, then, can the credit union movement maximize its degrees of freedom within the CFPB framework? I think it is highly unlikely that credit unions as a class of institutions will be exempted because “we wear the white hats.” The Bureau was created to “level the playing field,” to ensure that no financial-service firm could build a business model based on unfair, deceptive, or abusive acts or practices. True, few if any credit unions are guilty of these. But the core mission and strategy of the Bureau is to ensure that consumers get a fair shake for a given financial product – a mortgage, for example — regardless of the institution that provides it. It would be contrary to the Bureau’s core mission to simply provide a wholesale exemption for credit unions. There are, however, instances where a class of credit unions has been exempted, particularly for the Ability to Repay (ATR) or Qualified Mortgage (QM) rules. The CFPB provided an exemption for Community Development Financial Institutions (CDFIs) designated by the U.S. Treasury Department’s CDFI Fund. About 250 credit unions currently enjoy that designation, but the number is likely to grow substantially, since both NCUA and the National Federation of CDCUs are actively supporting credit unions in applying for CDFI designation. At the Bureau, I advocated unsuccessfully to extend the ATR waiver to all low-income-designated credit unions, which now number about 2,000 – nearly one-third of the entire credit union movement. This could be a fruitful avenue for the credit union movement to pursue, and one that I believe would not be at odds with the CFPB’s concern to preserve financial services for underserved, underbanked, and other low-income consumers. While creating wholesale carve-outs or exemptions is difficult, I do believe that persistent, well-documented arguments can create flexibility for credit unions. My advice to groups seeking a hearing from the Bureau is always this: bring data. The Bureau lives for data, the more the better; often, its regulations or reports are released only after the Bureau has analyzed literally tens of millions of data points on particular financial products. That has been, and will certainly be, the case when the Bureau moves to regulate overdraft or short-term small-dollar loans. Anecdotal “good news” stories won’t carry as much weight as massive documentation about credit union industry-wide practices. The credit union movement should use its considerable resources to crunch the numbers and make a persuasive, evidence-based case.
How Small is “Small?”
In the end, I believe the best chance for regulatory balance will come by finding common grounds on the issue of size: how small is small? There are several promising signs of movement. On April 30, 2014, a press release announced that the “CFPB Proposes Minor Changes to Mortgage Rules to Ensure Access to Credit.” On February 11, 2015 it issued proposed “Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act (Regulation Z).” This more recent document would revise “the Bureau’s regulatory definitions of small creditor, and rural and underserved areas, for purposes of certain special provisions and exemptions…“ It would “[raise] the loan origination limit for determining eligibility for small-creditor status… from 500 originations of covered transactions secured by a first lien, to 2,000 such originations…” (Reader: Please refer to the proposed rule for complete language.) I think that credit unions should be heartened by these demonstrations of CFPB’s flexibility, as well as indications of some bipartisan support in Congress for easing the regulatory burden on small institutions.
It’s About the Consumer!
The consumer will always be the supreme concern of the CFPB. While I will continue to support wholeheartedly the existence and current structure of the CFPB, I think there are good reasons why the CFPB should care about the health of credit unions as institutions – not because credit unions “wear the white hats,” or because they were not the culprits in the financial crisis. The argument for credit unions should focus on consumer impact, the CFPB’s touchstone. Regulatory burden is real. It did not start with the CFPB, as some would argue; it far predates the CFPB. But without question, small institutions – often, the ones that can and do show the most flexibility in meeting the needs of “subprime” low- and moderate-income consumers – are disappearing through mergers and consolidations. I am convinced that consumers will lose if small institutions like credit unions – and yes, even many community banks — are no longer around. © Clifford Rosenthal, 2015