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The CFPB Starts Flexing Its Muscles

The CFPB is coming online and has begun proposing rules and examining financial institutions.  While questions still abound on the bureau’s stance and operations, credit unions should consider the potential impact of new regulations.  For example, most credit unions weathered overdraft protection regulations fairly well by getting members to opt-in.  However, the CFPB is currently examining the policies and practices of the nine largest banks to see if additional regulation is necessary (Office of Information and Regulatory Affairs and Consumer Financial Protection Bureau).  Depending on the findings, income from overdrafts could be under threat.

Mortgage statements are another example.  The CFPB has stated that it would like to increase transparency in the mortgage servicing industry.  To do this, it is proposing regulations for monthly mortgage statements that would include alerts for delinquent borrowings with information for housing counselors and options to avoid foreclosures.  For adjustable rate mortgages, institutions would have to send warnings of interest rate adjustments and list alternatives consumers can pursue to avoid the adjustment (CFPB Seeks to Enhance Consumer Protections by Targeting the Mortgage Servicing Sector, National Mortgage Professional Magazine, April 2012).  Such changes can increase expenses as a result of changing the statements as well as the possibility of additional paper and postage from warnings depending on how the regulation is worded.

While the CFPB has said it will consider credit unions’ unique needs, the cost of compliance could likely increase as a result of new regulations.

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Consumer Behavior And Non-Interest Income

Last week, we identified some of the many threats to earnings. With regard to non-interest income, potential changes in regulation were identified to be a major threat. Building on that, here we would like to suggest changes in consumer (i.e., member) behavior as an additional threat to non-interest income. In these trying times, consumer behavior has evolved and people are spending less and saving more. Both of these actions sound like responsible things for consumers to be doing (and they are), but for your credit union, they likely translate into lower earnings. Many places we are working with are reporting decreases in both interchange income and overdraft (or courtesy pay) fees. Members are also working hard to deleverage themselves, leading to lower loan volumes and fewer late payment fees. Whether these are short- or long-term behavioral changes is a topic for debate, but, for the present, credit unions are feeling the impact.

If you aren’t already, make sure you begin to analyze the sources of your income inside and out. Do not merely look at your level of non-interest income as a whole, but understand the components of it and how they are changing. Many credit unions are seeing higher overall levels of non-interest income due to extraordinary mortgage originations. This extra income may be hiding declines in other areas, or increases in operating expense. While higher-than-normal levels of origination income may be helping your earnings today, they most likely are a short-term source of extra income. Sooner or later, interest rates will rise (no predictions here!) and/or the refinance boom will end and mortgage volumes will fall.