In March of 2021, Back Office support CUSO Aux finalized its findings from a nation-wide credit union survey on the effects the Democratic-controlled administration might have on the industry. This robust, 22-question survey explored a variety of topics for credit union cross-departmentally, including:
- Student loan forgiveness, minimum wage increases, and marijuana legalization effects
- Compliance and accounting regulations
- New leadership and changes at the CFPB
- HMDA changes
- CECL changes
- General hypotheses on a negative/positive impact to the industry
Aux, a leader in credit union research and collaboration, hopes to provide insight into the effects of a “Blue Wave” within the Executive and Legislative branches of government as well as primary-source perspectives on how this concentration of political power could affect credit unions in the year ahead.
Below are the participant statistics:
- Timeframe: February to March 2021
- Sample Size: 38 credit union decision makers
- Asset Range: $22M to $6.7B
- Distance span: San Francisco Bay Area, CA to Portland, ME
- Population/Population Density: 22,618/520 people per sq. mi. (Southeast Oklahoma) to 684,500/11,500 people per sq. mi. (Downtown Washington, DC)
- Political leanings (2018): Wyoming (46% conservative, 31% moderate, 18% liberal) to New York (27% conservative, 35% moderate, 30% liberal)
As expected, this survey generated a wide variety of responses, some quite agitated and negative, and others celebratory and positive. The pace of anticipated change was also divided along a progressive versus traditional leaning. This sliver of participants represents the divided political landscape in our country, but regardless of leanings and opinions, the industry will need to adapt to any enacted changes.
Upcoming Trends and Legislation
When asked if marijuana would become legal in all 50 states within the next 2 years, 32% of participants said yes, 55% said no, and 13% said other (5 years or not anytime in the near future).
When asked what year national cannabis banking will be addressed and regulations drafted for its eventual adoption by bank and credit unions, 39% said 2022, while 2023, 2024, and 2025 were chosen equally around 17%.
It’s worth noting the announcement that Mexico will likely legalize recreational marijuana in the coming months. This move puts mounting pressure on the United States, as they will be placed between two of the largest recreational marijuana markets – Canada and Mexico.
Student Loan Forgiveness
When asked to rate the likelihood of student loan forgiveness being passed in 2021, responses averaged right smack in the middle at 53, on a scale of 0 (not likely at all) to 100 (extremely likely). Responses ran the full gamut, from 0 to 100.
Aux then asked if participants have included the possibility of student loan forgiveness in their risk assessment. 61% said no, and 16% said yes. Nearly a quarter responded N/A because they currently do not have a student loan portfolio.
When asked what the likelihood was of a national minimum wage increase to $15 per hour being passed this year, responses averaged 60, on a scale of 0 (not likely at all) to 100 (extremely likely).
Aux then asked an open-ended question regarding what the effect of such minimum wage increase would be on participants’ payroll, ability to recruit and retain the talent, and/or fee income. The majority commented that they already pay more or close to this amount, so the effects would be immaterial. A few from rural areas commented that it would hurt them. “At least $18,000 more in payroll will hinder ability to retain talent, as we won’t be able to afford a commensurate increase in other salaries of more recently hired talent.”
CFPB and NCUA Changes
Aux asked participants if they thought new leadership at the NCUA and CFPB will result in more or less compliance burden for credit unions. On a scale of -10 (much less) to 10 (much more), the responses averaged an 8, which shows a significant expectation across the board that there will be more compliance burden.
When asked an open-ended question regarding how the influence/focus of CFPB will change, a common thread in responses was more regulation and tougher enforcement.
Aux then asked what participants’ top three concerns were with the new leadership at the CFPB, which were a series of three fill-in boxes. Unsurprisingly, the vast majority wrote over-regulation as their top concern. Other second and third tier concerns included increased fixed costs, increased emphasis on Fair Lending, CECL, and debt collection.
Finance and Accounting
Participants were asked what the financial and accounting risk reporting requirements environment will be like over the next two years. On a scale from -10 (less stringent) to 10 (more stringent), the average was 6, a considerable consensus of more strictness.
They were then asked what their credit union’s most pressing finance and accounting issue currently was. The majority of participants responded that CECL enactment keeps them up at night.
Aux CFO and head of outsourced accounting services Diane Parham commented, “The future of CECL remains cloudy, however, credit unions need to be preparing for CECL now. CECL requires a more in-depth look at losses and the data takes time to compile. Even if CECL never comes to fruition, the data gathered in preparation can be incredibly useful in current ALLL analyses or to gain a better understanding of collection/recovery efforts.”
Participants were asked what the credit union regulatory and compliance environment will be like over the next two years. On a scale from -10 (less stringent) to 10 (more stringent), the average was 7, an even more considerable consensus of severity.
They were then asked what their credit union’s most pressing compliance issue currently was. As with top accounting concerns, CECL was a common thread, but staying on top of regulations and fraud were also issues:
- “The amount of personnel to manage all compliance issues. This continues to kill smaller credit unions.”
- “Staying current on all legislation.”
- “Covering the costs related to security breaches at Point of Purchase locations, (such as Target, Home Depot). Our cost to replace cards and cover losses falls completely on us, while the vendor gets a slap on the wrist.”
- “Fraud, Fraud, Fraud. The card brands and law enforcement push losses onto the CU and the losses continue to mount and recoveries are non-existent. HUGE penalties for data breaches at retailers etc.”
Aux VP of Compliance Gaye DeCesare comments on the compliance environment: “Two months into the new administration, we are already seeing some of these changes. The CFPB is not yet issuing new regulations, but we’re seeing guidance and clarification on existing regulations, and that’s a good thing.”
HMDA: When asked if participants anticipated any changes to HMDA regulations, 61% said yes and 26% said no, and the rest unsure.
CECL: When asked if participants expected the implementation of CECL would be moved up or further delayed, 53% said further delayed, 13% said moved up, and 34% said it would stay the same or they weren’t certain.
MBL Cap: Aux asked how likely is it that Congress and the regulatory agencies will address the MBL cap, and participants were split down the middle. On a scale from -10 (not at all likely) to 10 (very likely), the average was 0.
Consumer Data: When asked if participants expect stricter controls and regulations regarding consumer data/information protection, 100% said yes. This was the only question in the whole survey where the answers were unanimous.
Aux’s DeCesare also warns against a doom-and-gloom approach to regulations. “Not all [new] regulation is bad,” she says. “Compliance management is key. When it comes to the renewed focus on consumer protection, credit unions can share the costs and benefits by collaborating.”
When asked if the Biden Administration would be more or less focused on making changes in the financial services industry than the Trump Administration, 75% felt that Biden would be more focused on making changes.
Aux asked participants to rank 17 issues they believe will receive the most attention in the coming year from the political apparatus. The top issues ranked as follows:
- Additional COVID stimulus and CARES Act legislation;
- Consumer protection legislation followed closely;
- Cybersecurity risk, fair lending practices, minimum wage reform, and Increased taxation (individual and business) all tied as major issues as well.
Participants were asked if the credit union tax exemption was more or less at risk with the concentration of partisan political power. On a scale from -10 (less at risk) to 10 (more at risk), the average was 4. Interestingly, responses ran the full-scale range, from -10 to 10, illustrating the vast difference in opinion regarding the future of tax exemption.
Aux also asked two open-ended questions that sparked lively comments. The first asked what fears participants had regarding potential negative impacts of a “Blue Wave” on credit unions. Over-regulation and taxes were at the forefront of most responses.
There were a handful of “not sures,” and quite a few strong opinions:
- “Taxation. They are going to have to pay for all of the stimulus somehow and credit unions will be attacked by banks again.”
- “Democrats are more sympathetic to the people, which is the same philosophy as credit unions, so I don’t believe there will be a negative impact.”
- “The idea that consumption rather than productivity, and the political definition of “fairness” will further increase operating costs for credit unions. Moratoriums on contractual obligations between lenders and borrowers will be superseded by politicians and/or executive order without the rule of law.”
- “None. It is a positive. We finally have true leadership.”
- “The regulatory burden will only increase the rate of consolidation. The costs of compliance will be passed onto members. The lack of focus on our business will be harmful to credit unions as a whole.”
The second asked what benefits participants expected regarding positive impacts of a “Blue Wave” on credit unions. Tax exempt status and CDFIs were a common thread.
- “More transparency, more concerned for less wealthy, more opportunities to serve, truth, greater opportunity to help others who aren’t the rich.”
- “From a Federal perspective I don’t see any benefits. From a State perspective there may possibly be legislation passed that CU’s have been lobbying for.”
- “Less risk of losing the federal tax exemption on CU’s, specifically those serving low-income communities.”
- “I see more funds in the Stimulus for CDFI credit unions. I’m not one because the vast majority of my members are in rural locations and get their mail at a post office. PO Boxes are automatically excluded which excluded my low-income members from the formula. Hopefully they will come up with exceptions or way to help us qualify so we can get access so CDFI grants/funds.”
- “Less FOM restrictions; more CDFI funding; MBL reform.”
And this gem, which pretty much sums up our divided nation: “I see no positive impact. Anyone who believes the impact will be positive to CUs is an absolute idiot.”
Aux CEO Doug Burke is taking a moderate, hopeful approach to the anticipated industry changes: “The national environment is very divided at the D.C. political perspective, with consumers and credit union executives. I believe the Blue Wave will lean toward democratic ideology and we will see them pushing their agenda while they have the power. But I also believe the president won’t be abusive with the power to try and make it look like he’s not slamming the Republicans. He will try to have some balance…but with the blue tint.”
DeCesare has been involved in credit union compliance for 30 years, and again urges credit unions to take a step back and not jump to conclusions. “Pro-consumer is not equal to anti-business,” she notes. “Many credit union executives are concerned about the administration’s effects on American businesses. In my experience, I’d advise a measured approach. Let’s see what happens and act accordingly.”
Lastly, Aux solicited open-ended responses on what we thought was a straight-forward question: Democratic Executive and Legislative branches may be more sympathetic to the credit union cause. Where should the movement spend its political capital and energy? This was not the case, as many participants remarked, “I don’t agree with this statement at all.” From there, responses were as varied and wild as you could imagine in this political climate:
- “Supporting the democratic candidates.”
- “Saving our tax-exempt status, saving smaller credit unions from the crush of new regulations.”
- “Pushing back against the anti-business Democrats and support the pro-business Republicans.”
- “Regulatory relief for credit unions compared to the national banks. More regulations for fintech to level the competition.”
- “Keep Credit Union tax exemption. Keep the postal service out of banking services. Expand Credit Union membership options for the underserved community.”
- “Diversification in membership and efforts to lend to minority and disenfranchised membership.”
- “Increased lending caps, increased field of memberships etc. Concern that states (like Iowa) will try and tax CUs. We need more federal support of CUs against taxing CUs at the state level. IE: Tax CUs at the state and the state would lose X federal dollars.”
- “Gain Federal and State support for Small Credit union initiatives and programs which allow smaller community-based CUs to get federal funded programs out into the communities. Versus having mid to large size “for profit banks” and large CUs being the conduits. The CU industry must focus on the sustainability of small CUs to decrease the rate of consolidation. Otherwise, the CU industry is heading toward extinction.”
The last comment struck a chord with Aux CFO Parham. As the head of Aux’s outsourced accounting services, who have helped many small and mid-sized credit unions with accounting support and staffing, Parham understands the immense pressure small credit unions feel. “We feel that a shared services model is critical to the mitigation of mergers. We’re here to help small credit unions not only stay afloat, but to find a way to thrive. We exist to help all credit unions, big and small, but we provide a unique set of services that small credit unions struggle to provide in-house. We help the small credit unions remain not only viable, but competitive,” she says.
We, at Aux, knew this topic would spark a lively set of responses across a broad spectrum, and much of it driven by political beliefs and values. Nonetheless, these issues are worthy of discussion and debate as they can affect the future of our industry. We believe it is part of our mission to help create a meaningful dialogue on critical issues facing the credit union movement by surfacing insights and stimulating new ideas. Every quarter, we intend to field a survey that probes and generates responses to issues that could positively or negatively impact the industry.