Credit unions, large and small, are more vulnerable than ever to regulatory scrutiny. The main culprit is the “potential” compliance scrutiny they face from state and federal regulatory audits. The infrastructure required to build robust compliance departments has already caused a sharp decline in the industry, and it's the fear of what could happen that’s already causing the industry to shrink, instead of grow.
As part of our commitment to credit unions, we have been exploring solutions to the “crippling” regulatory challenges that lenders face. Recently, using our combined experience, we have worked with SWBC to develop solutions that reduce risk for credit unions that are preparing to face (or are already facing) similar challenges.
As an early entrant to the FinTech space, we were off on our merry way in 2007, building software to identify and mitigate potential full balance skip charge offs. Just before we launched our masterQueue® software in 2010, a couple of guys named Dodd and Frank walked into the bank and it changed our world, and if it hasn’t already, it will change yours as well—especially as they orchestrate a complete rewrite to the Fair Debt Collections Practices Act (FDCPA), which hasn't been touched since 1977.
Is there a solution to the aforementioned challenges?
I have some good news for you—yes, there is. In today’s blog post, I’ll address the problems lenders face, provide tips on identifying potential violations. Stay tuned for our companion post tomorrow where we will dive into ways you can get compliant by taking a trip back to kindergarten.
The Struggle is Real
To understand the solution, we need to first look deeper at the issues and the problems, both real and potential. We can start by listening to leaders within the credit union industry, as they have already verified the situation is not only real, but the impact should make every credit union stop, evaluate, and get serious about making changes that will get them through these challenges, because these issues are not likely going away—no matter who gets elected.
Linda Sweet, President of Big Valley Credit Union in Sacramento, testified in front of Congress in 2013 that she was witnessing firsthand what regulation was doing to the credit union Industry. She told a House Small Business Subcommittee on Investigations, Oversight and Regulation hearing the following:
“The impact of this growing compliance burden is evident as the number of credit unions continues to decline, dropping by more than 800 institutions since 2009. While there are a number of reasons for this decline, a main one is the increasing cost and complexity of complying with the ever-increasing onslaught of regulations.”
According to NAFCU, the number of credit unions continues to decline, dropping by more than 17%—that’s more than 1,280 institutions—from the second quarter of 2010 through the end of 2015.
The issue at hand remains; how can credit unions, especially those that are smaller- and mid-sized, manage the almost insurmountable requirements of state and federal regulatory agencies, particularly as it relates to the activities of their collection departments, which appear to be the next target on the CFPB hit list.
How to Build a Strategy to Overcome This Challenge
Start with common sense and the need to do the right thing.
You can hire a company to come in and perform a mock CFPB audit, or you can hire and train an internal staff member to examine every process and system you use to make sure that both meet your needs to move forward into 2017 and beyond. If you decide to manage your audit in-house, take the following steps:
1. Audit Your Policies and Procedures
First, take a good look at all your internal policies and procedures. Look for gaps between the various state and federal laws, as well as the interpretation of these laws as seen in specific enforcement already taken by regulators against lenders and their vendors. This type of data is available, but it’s a big job to gather, organize, and use to your benefit.
One suggestion to economically gather this data is to hire college interns who are studying in related fields and eager to learn. We have done this in a variety of areas and it has been beneficial for the students, and for our company. We currently have interns from Princeton, The University of Washington, William Jessup University, and the University of California, Santa Barbara. They benefit from the pay and real world experience, and we benefit from having a dedicated team that is able to focus on specific areas we normally wouldn’t, given limited staff resources.
2. Audit Your Service Providers
Once you gather the information you need, the next step is to compare what you’re doing with what the regulators say you should be doing. Next, and possibly more important, is to examine how you recruit, hire, and oversee any service providers you’re using; such as loan servicing companies, collection agencies, debt buyers, repossession agencies, skip or forwarding companies, door knock companies, etc.
As most of you know, on April 13, 2012, the CFPB released a statement holding all lenders responsible for the actions of their external vendors, and each year since, they have gotten more serious about enforcing this rule to the tune of hundreds of millions of dollars in fines not covered by your service providers’ insurance policies.
3. Step Up to the Plate
Finally, build a culture within your organization to do everything in your power to meet and exceed all these requirements. Complaining won’t do any good, so tell your complainers to “zip it.”
Believe it or not, I find that Robert Fulgham’s book, “All I Really Need to Know I Learned in Kindergarten,” provides some basic rules for meeting compliance requirements. Having participated in a couple examinations by the CFPB with our clients who are Top 20 Auto Finance lenders, we’ve seen firsthand why it’s important to get back to your roots, i.e., kindergarten.
Stay tuned for tomorrow’s post where we will dive into exactly how credit unions can take the basic things taught in the kindergarten classroom to ensure they’re running a compliant operation.