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Credit Unions Are the Best Way for Consumers to Conduct Their Financial Services Credit unions are not-for-profit financial cooperatives. Overall, 99 million U.S. consumers are member-owners of, and receive all or part of their financial services from, the nation's 6,800 credit unions. Credit unions are a small, but constant and stable presence in the financial services industry. Credit unions hold about 6.7% of depository institution assets, up from about 5.5% two decades ago. As cooperatives, owned and controlled by their members, credit unions take pride in their "people helping people" philosophy. Every credit union’s board of directors is elected by its members; each member has an equal vote, regardless of deposit size. Credit unions have no outside stockholders, so after reserves are set aside, earnings are returned to members in the form of dividends on savings, lower loan rates or lower fees on services. Because credit unions are in business to serve their members, they provide superior member service and consistently rank first among financial institutions in consumer satisfaction. Credit unions primarily engage in consumer, residential real estate and small business lending. Credit unions saw a resurgence in interest during and following the financial crisis, thanks in large part to the fact that Americans recognized that credit unions did not engage in the activity that caused the crisis, and they did not need a taxpayer bail-out, unlike other financial institutions. While credit unions were affected by the crisis, credit union asset quality remains very high in the current market with first mortgage delinquencies at 1.28% and overall loan delinquencies at 1.02% as of September 2013. Credit union capital is equal to 10.4% of total assets – far above the 7% regulatory minimum to be considered “well capitalized”.

All Consumers Benefit by Having Credit Unions in the Marketplace Benefits to Credit Union Members Lower interest rates and fees than for-profit banks. Higher rates of return on deposits than for-profit banks. One member, one vote gives credit union members a voice in credit union operations. Great service from a financial institution that exists to serve members. Benefits to All Consumers The presence of credit unions in a market motivates banks to keep their rates and fees competitive, benefiting all consumers. Credit unions provide stability to the financial industry. Credit unions did not need a taxpayer bailout because the not-for-profit structure discourages excessive risk-taking.

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February 2014


Did You Know? Credit unions are exempt from Federal and most State income taxes because they are member-owned, democratically operated, not-for-profit cooperatives, generally managed by volunteer boards of directors, with a specified mission of promoting thrift and providing access to credit for provident purposes. This rationale for the tax-exempt status has been reaffirmed by Congress several times since it was first enacted in 1937. Even though credit unions are exempt from Federal income tax, they pay other types of taxes. Federal credit unions pay real property taxes, tangible personal property taxes (referred to as “ad valorem” taxes in some states) and payroll taxes for their employees. In addition, state chartered credit unions also pay unrelated business income tax (UBIT). Credit union members pay taxes on dividends (interest) that their accounts earn. Our Ask: Members of Congress should be outspoken in their support for the credit union tax status, and should not use the tax status as a mechanism to prevent improvements to the Federal Credit Union Act.

Preserving the Credit Union Tax Status What are the Policy Issues? •

A tax on credit unions would be a tax increase for millions of credit union members. o

Today, 99 million Americans use credit unions to conduct financial services – building savings and accessing credit, and a tax on credit unions would adversely affect them.

The credit union tax status still serves the purpose for which it was created. o

For a modern day example of how important the credit union option is for Americans, look no further than how credit unions responded during the financial crisis. 

During and following the financial crisis, Americans saw credit unions as a safe haven in the financial services sector – more than 2.4 million memberships were opened in credit unions in 2013!

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February 2014


Credit unions continued to lend to consumers, homebuyers and small businesses when other lenders were unable or unwilling to do so.

This counter-cyclical effect – the ability to continue to provide credit during crisis – is one of the key reasons that credit unions were originally established by Congress as an alternative to the for-profit banking sector.

The credit union tax status is good public policy. o

Credit unions employ the tax status to the benefit of all Americans – credit union members and those who are not credit union members. 

While the Joint Committee on Taxation estimates that the credit union “tax expenditure” will “cost” the federal government $0.5 billion in 2012 and 2013, consumers benefit to the tune of $8 billion annually because credit unions are taxexempt.

Credit union members see this benefit in terms of lower rates on loans, lower fees on services, and higher returns on deposits.

Non-members benefit as well because credit union competition helps keep bank savings rates higher and loan prices lower. Imagine how expensive other lenders would make credit cards or auto loans if credit union competition did not exist!

What are the Implications for Credit Unions? •

Eliminating the credit union tax status eliminates credit unions. It is that simple. o Credit unions are people helping people. They exist to serve their members, as opposed to banks which exist to make profit for their shareholders. o If credit unions are taxed, there would be no incentive for them to remain not-for-profit; the large credit unions would likely convert to banks; the small credit unions would likely liquidate; and our economy will lose the only sector of the financial industry that is not driven by profit, but rather driven by a dedication to serve its members. o It would be poor public policy, resulting in negative consequences for millions of savers and borrowers.

Credit unions are the best way for consumers to conduct their financial services. Taxing credit unions takes this option away from consumers, and will drive up the cost of financial services for all.

Protecting Credit Union Members from Merchant Data Breaches

Prepared by CUNA Legislative Affairs

February 2014


What are the Policy Issues? Did You Know? Credit unions are subject to stringent data security and notification standards. When merchant data breaches occur, credit unions and other financial institutions bear the actual costs of the breach, including fraud and fraud prevention costs. Financial institutions have an obligation to notify consumers that their account has been compromised when merchant breaches occur, but the financial institution may not disclose the merchant that compromised the account, even if that information is known. Our Ask: Any data security bill considered by Congress should recognize that credit unions are subject to high data security standards under the Gramm-Leach-Bliley Act (GLBA), and should hold merchants to these same standards. Merchants should be required to reimburse credit unions for the costs they incur as a result of merchant data breaches. Credit unions should be allowed to tell their members the name of the merchant that suffered the breach when notifying them that their account had been compromised, if that information is available and if its disclosure would not adversely affect an investigation.

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Merchants are not subject to the same data security standards as credit unions. Major merchant data breaches expose credit unions to significant monetary costs and reputational risk. Credit unions cover the cost not only of fraud, but also costs of blocking transactions, reissuing cards, increase staffing at call centers and monitoring consumer accounts. Dependent upon state law and other regulations, credit unions may not be able to disclose the source of a merchant data breach, putting at risk the reputation of the institution.

What are the Implications for Credit Unions? • • • •

Data security is a shared responsibility of everyone involved in the payments process. Merchants should work with financial institutions to ensure that consumer data is adequately protected. Shared responsibility means equitably assigning responsibility for who pays when the system is breached. Consumers will be protected from any fraud or financial loss due to the breach by their credit union, not by the merchant where the data breach occurred. According to a survey of our members, early estimates of the Target data breach put credit union costs at approximately $5.10 per card affected by the security lapse. This equals, at a minimum, a total cost of $25-30 million for credit unions alone. S. 1927 replaces a patchwork of state laws with one national standard for data security breach notification requirement. The bill requires any business that maintains sensitive

Prepared by CUNA Legislative Affairs

February 2014


personal and financial information – including financial institutions, retailers, and data brokers – to implement, maintain, and enforce reasonable policies and procedures to protect the confidentiality and security of sensitive information from unauthorized use. Did You Know? Credit unions are increasingly important players in the residential mortgage market, originating approximately 7.2% of all first mortgages. Since 2007, credit unions have originated over a quarter of a trillion dollars in residential first mortgages. Credit unions rely on a functioning secondary mortgage market. While credit unions have traditionally been portfolio lenders, selling approximately 53% of their originations, in recent years, they have sold a higher percentage of their new loans to the secondary market. Our Ask: As Congress considers comprehensive housing finance reform, it is imperative that the new system facilitate credit union lending so that they may continue to be a source of reliable mortgage credit for their members.

Several other bills have been introduced in this Congress with regard to data security as well.

S. 1927 – the Data Security Act of 2014 (As of 02.12.14) Lead Sponsors: Sen. Carper (D-DE) and Sen. Roy Blunt (R-MO) Last Action: Introduced in the Senate January 15, 2014 and referred to the Senate Banking, Housing, and Urban Affairs Committee.

Housing Finance Reform Should Keep the Secondary Mortgage Market Open to Credit Unions What are the Policy Issues? •

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The federal government has a very important role to ensure the secondary market operates efficiently, effectively and fairly for borrowers and lenders alike. Credit unions create much needed competition in the secondary marketplace, which in turn, helps to keep rates low and allows more options to consumers. As Congress considers comprehensive reform of the housing finance system, credit unions have some concern about a world in which the secondary mortgage market is occupied by a handful of very large banks. The following principles are important to consider as comprehensive housing finance proposals are developed.

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February 2014


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Equal Access: The secondary market must be open to all lenders on an equitable basis.

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Strong Oversight and Supervision: There should be appropriate regulatory oversight to ensure safety and soundness, including strong capital requirements.

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Durability: The new system should ensure that mortgage loans will continue to be made to qualified borrowers even in troubled economic times.

o Preservation of the 30-year fixed rate mortgage: This product is the centerpiece of the mortgage lending market, and the new system should facilitate its availability to qualified borrowers. A government guarantee, which should be paid for by the borrower, is essential to the continued availability of this product. o

Affordable Housing: The important role of government support for affordable housing should be a function separate from the responsibility of secondary market entities.

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Transition: The transition to the new housing finance system must be reasonable and orderly.

What are the Implications for Credit Unions? •

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Mortgage lending is a significant activity for many credit unions and is a vital financial service for their members. Reform of the housing finance system will be difficult, but failing to make necessary changes to improve the system will result in even greater challenges for the economy, credit unions, and borrowers. If changes are made which create barriers to credit union access to the secondary market or which disrupt the currently fragile market, the mortgage lending needs of credit union members and other consumers may not be met. Legislation should not result in putting control of the secondary mortgage market into the hands of a few large banks. It is essential that any legislation passed by Congress does not directly or indirectly price credit unions out of the mortgage market.

Regulatory Burden: The Crisis of Creeping Complexity

Prepared by CUNA Legislative Affairs

February 2014


What are the Policy Issues? Did You Know? The frequency with which new and revised regulations have been promulgated in recent years and the complexity of these requirements is staggering. Credit unions were subjected to more than 120 regulatory changes from at least 15 different federal agencies between 2008 and 2012. All of these were issued before the Consumer Financial Protection Bureau (CFPB) completed its first rule. Regulatory burden is of particular significance to credit unions. Approximately 1,000 credit unions operate with one or fewer full-time equivalent employees. Nearly one-half of the nation’s 6,800 credit unions operate with five or fewer full-time equivalent employees. Our Ask: Congress should continue to exercise diligent oversight over the CFPB to ensure that its rulemakings do not burden credit unions, which are already very well regulated. Congress should encourage the CFPB to aggressively use its authority to exempt credit unions from its rules when appropriate. Congress should prevent lawsuits against credit unions for not being in compliance with new mortgage rules, especially given the short amount of time they have had to comply.

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The CFPB has recently implemented eight mortgage rules, seven of which were finalized in October 2013 and effective in January 2014. Taken together, these rules and the commentary that accompanies them total more than 5,000 pages. Credit unions are working to comply with these rules, but have not had enough time to come into compliance. The CFPB and the NCUA have said that they will not write up credit unions that are making a good faith effort toward compliance, but the Truth in Lending Act carries a private right of action which exposes credit unions to potential lawsuits for noncompliance. Only Congress can protect credit unions from these lawsuits.

What are the Implications for Credit Unions? •

Every time a rule is changed, there are certain upfront costs that must be incurred: staff time and credit union resources must be applied in determining what is necessary in order to comply with the change; forms and disclosures must be changed; data processing systems must be reprogrammed; and staff must be retrained. The burden of complying with ever-changing and ever-increasing regulatory requirements is particularly onerous for smaller institutions, like credit unions, because most of the costs of compliance do not vary by size, and therefore proportionately are a much greater burden for smaller as opposed to larger institutions.

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February 2014


Every dollar a credit union spends on complying with regulation is a dollar not used for the benefit

Did You Know? Credit unions did not cause the housing and financial crisis. At the height of the crisis, annual losses on credit union mortgage loans were merely 0.4%. Eight rules mandated by the Dodd-Frank Act were issued in 2013 alone, including ability-torepay/qualified mortgage, loan originator compensation rules, Truth in Lending Act regulations and rules related to the Real Estate Settlement Procedures Act. Our Ask: Congress should enact legislation that protects credit unions from lawsuits while they work to come into compliance with new mortgage rules. Congress should enact legislation that allows credit unions to exclude certain points and fees from counting against what is considered a ‘qualified mortgage’.

of its members. Credit unions did not cause the financial crisis; they did not engage in abusive activity. They should be provided accommodation to continue to offer products as they have been for years, without the crippling burden of new regulations designed to reign in the abusers.

Active Regulatory Relief Legislation Supported by Credit Unions: • • • •

Mortgage Regulation Relief Privacy Notice Modernization Examination Fairness Structural Reforms to the CFPB

New CFPB Mortgage Rules Worsen Credit Union Regulatory Burden What are the Policy Issues? •

Credit unions need more time to come into compliance with the new regulations. o The CFPB has recently implemented eight mortgage rules, seven of which were finalized in October 2013 and effective in January 2014. Taken together, these rules and the commentary which accompanies them total more than 5,000 pages. o The Truth in Lending Act carries a private right of action which exposes credit unions to potential lawsuits for noncompliance of the rules. Only Congress can protect credit unions from these lawsuits. The Qualified Mortgage rule is too restrictive.

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February 2014


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For a mortgage to be considered a “qualified mortgage,” total points and fees generally

Did You Know? Every year credit unions are required to send millions of privacy notices to their members, most of which go unread and even unopened. Since 2001, credit unions have sent over 1 billion privacy notices to their members, averaging over 87,000,000 notices a year. Our Ask: Support S.635/H.R. 749, the Privacy Notice Modernization Act. This legislation passed the House unanimously in each of the two previous Congresses.

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may not exceed 3% on a loan of $100,000 or greater. These fees include affiliate and non-affiliate charges such as title insurance, surveys, appraisal fees, underwriting, processing and application fees. The CFPB will consider loans made by some institutions as a qualified mortgage if the institution is under $2 billion in assets and/or originate fewer than 500 first-lien mortgages. However, this ignores the performance of credit unions loans and instead focuses on institution size.

What are the Implications for Credit Unions? •

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As credit unions work to come into compliance with the regulations, the CFPB and the NCUA have announced that they will not cite credit unions for noncompliance if they are making a good faith effort to comply with the regulations, but the regulators are powerless to protect credit unions from lawsuits as a result of noncompliance. Only Congress can delay the private right of action. Although indexed for inflation, the thresholds in the rules may prove problematic because certain fees are fixed and not dependent upon the size of the loan. For smaller loan amounts, these fix fees will constitute a higher percentage of the total loan. Credit unions which work with an affiliated title company to obtain better rates for their members are especially harmed by this rule, because they are required to include title fees in the points and fees calculations; however, lenders that work with an unaffiliated title company do not have to include those fees in the calculation. As a result, points and fees will appear to be a higher percentage of the loan at credit unions using affiliated title companies, even though the credit union member is almost certainly getting a better deal at the credit union.

S. 1577 / H.R. 3211 – The Mortgage Choice Act of 2013 Lead Sponsors: Sen. Joe Manchin (D-WV) / Rep. Bill Huizenga (R-MI) Cosponsors: 7 in the Senate/ 36 in the House Alabama: Rep. Bachus; Florida: Reps. Murphy, Rooney, Ross Last Action: Introduced in the Senate 10.28.13 / Introduced in the House 9.28.13

(As of 02.12.14)

The Privacy Notice Modernization Act What are the Policy Issues? •

Under current law, financial institutions are required to send an annual privacy notification on information sharing practices to its members or customers.

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February 2014


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The Privacy Notice Modernization Act would require a privacy notification be sent to a member or customer when the policy changes, rather than a redundant annual notice that is often overlooked. The Privacy Notice Modernization Act is a common sense regulatory relief measure that would make privacy notifications more meaningful for consumers.

What are the Implications for Credit Unions? • • • • • •

Credit unions must strictly follow an ever increasing number of rules and regulations. As a result, streamlining outdated or burdensome regulations is a very important aspect in providing regulatory relief. Credit unions strive to provide the most effective and efficient services to their members, which includes ensuring their members are aware of their privacy rights. The Privacy Notice Modernization Act would provide benefits for both credit unions and their members, by streamlining compliance burden and enhancing greater member awareness of the credit union’s privacy policies. Streamlining this ineffective regulation will reduce the amount of diverted time and resources that a credit union’s staff could be using for more important services to its members. Eliminating unnecessary mailings reinforces the emphasis credit unions place on ensuring their members are not bombarded with a flood of unnecessary mail – while ensuring at the same time the mail that members do receive is given greater attention. This bill is a straightforward, common sense solution that reduces regulatory burden for credit unions. This legislation was supported by both Republican and Democratic leadership, and it was passed by voice vote in the House in both the 111 th and the 112th Congress.

S.635/ H.R. 749 – The Privacy Notice Modernization Act (As of 02.12.14) Lead Sponsors: Sen. Sherrod Brown (D-OH) / Rep. Blaine Luetkemeyer (R-MO) Co-sponsors: 44 including Sen. Jon Tester (D-MT) / 73 including Rep. Brad Sherman (D-CA) Alabama: Rep. Bachus; Sen. Sessions; Florida: Reps. Bilirakis, Hastings, Miller, Nugent, Ross, Wasserman-Schultz, and Wilson; Sens. Nelson and Rubio Last Action: Introduced in the Senate 3.21.13/ Passed the House 3.12.13

Financial Institution Examination Fairness

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February 2014


What are the Policy Issues? Did You Know? Concerns regarding credit union and small bank examinations increase during difficult economic times. In a survey conducted by CUNA, 28% of credit unions reported dissatisfaction with their exam in 2012. One of the more common concerns among credit unions is that examiners tended to focus too much on their own view of best practices rather than on legal and regulatory requirements. In testimony before Congress, the National Credit Union Administration (NCUA) admitted that they do not document each examination finding with a specific reference to NCUA rules and regulations and expressed concern with legislation that would require them to do so. Our Ask: Support H.R. 1553/ S.727, the Financial Institutions Examination Fairness and Reform Act.

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Credit unions support strong but fair and appropriate safety and soundness regulation and supervision to protect the financial resources of credit unions and their members and to minimize costs to the National Credit Union Share Insurance Fund (NCUSIF) borne by all federally insured credit unions. Examinations should be based on the laws Congress enacts and the regulations that the NCUA promulgates, and the appeals process should protect credit unions from examiner retaliation. The Financial Institutions Examination Fairness and Reform Act (FIEFRA) would make available to financial institutions the information used by examiners to make decisions in their examination; codify certain examination policy guidance; establish an ombudsman at the Federal Financial Institution Examination Council (FFIEC) to which financial institutions could raise concerns with respect to their examination; and, establish an appeals process before an independent administrative law judge.

What are the Implications for Credit Unions? • •

Credit unions face a crisis of creeping complexity with respect to regulatory burden which is made all the more challenging by current examination practices. Many credit unions are uncertain about how their next examination will differ from the last. This uncertainty leads to widespread fear among credit unions of retaliation, should they make attempts to challenge inconsistencies in the process. o In a 2012 CUNA survey, 25% of credit unions felt the need to appeal their supervisory decision; however, only 5% of credit unions followed through with an appeal, the remainder citing a fear of retaliation. Credit unions have the right to manage risk without being directed to eliminate it by examiners. In that regard, regulators should address the supervision and examination of credit unions in a professional manner, taking into full account the legal requirements credit unions must meet as well as the need for credit unions to have reasonable flexibility to serve their members well. The Financial Institutions Examination Fairness and Reform Act (FIEFRA) takes firm steps in the right direction toward making the examination process fairer and more consistent.

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February 2014


H.R. 1553/ S.727 - The Financial Institutions Examination Fairness and Reform Act (As of 02.12.14) Lead Sponsors: Rep. Capito (R-WV) & Rep. Maloney (D-NY)/ Sen. Jerry Moran (R-KS) Co-sponsors: 135 in the House/18 in the Senate Alabama: Reps. Bachus, Brooks, Sewell; Florida: Reps. Bilirakis, Crenshaw, Murphy, Nugent, Posey, Rooney, Ross Last Action: Referred to House Committee 4.15.13/ Referred to Senate Committee 4.15.13

CFPB Reform

Prepared by CUNA Legislative Affairs

February 2014


What are the Policy Issues? Did You Know? The Consumer Financial Protection Bureau (CFPB) is led by a single director, appointed by the President and confirmed by the Senate. CUNA has long supported a commission to head the Bureau that includes someone with credit union experience. Regulations issued by the CFPB can only be stopped by a 2/3 vote of the Financial Stability Oversight Council. The CFPB does not need to disclose to consumers how information about them is used and to whom it is shared. The CFPB is not under the Congressional appropriations process. Our Ask: Support legislation to reform the CFPB: H.R. 2446, the Responsible Consumer Financial Protections Regulations Act of 2013; H.R. 3193, the Consumer Financial Protection Safety and Soundness Improvement Act; H.R. 2571, the Consumer Right to Financial Privacy Act; H.R. 3183, a bill to provide consumers with a free annual disclosure of information the CFPB maintains on them; and, H.R. 3519, the Bureau of Consumer Financial Protection Accountability and Transparency Act.

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Leadership of the CFPB: The CFPB is currently led by a single director, appointed by the President and confirmed by the Senate. The CFPB should be led by a five-person commission so long as one of those individuals has experience related to credit unions (H.R. 2446). Powers of the Financial Stability Oversight Council (FSOC): The FSOC can, under current law, stay or set aside regulations passed by the Bureau that are inconsistent with safe and sound operations of a financial institution by a 2/3 vote. CUNA advocates lowering this to a simple majority threshold (H.R. 3519).

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February 2014


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Funding: The CFPB should be funded through the regular appropriations process, which provides an additional layer of oversight to the Bureau (H.R. 3519). Use of Consumer Information: The CFPB is currently exempted from the Right to Consumer Privacy Act of 1978. A bill (H.R. 2571) introduced by Rep. Duffy (R-WI) would prohibit the CFPB from requesting, accessing, collecting, using, retaining or disclosing nonpublic personal information about a consumer until it has clearly disclosed to the consumer what information will be used and the consumer has agreed. Another bill (H.R. 3519), introduced by Rep. Westmoreland (R-GA) would require that CFPB provide, at a consumer’s request, one free annual report disclosing all information about the consumer the CFPB holds.

What are the Implications for Credit Unions? • • •

The CFPB is necessary to regulate those that have previously been under regulated or unregulated. CUNA supports this mission of the CFPB. However, CUNA supports reforms to the Bureau to ensure it is targeting the right audience and not unfairly burdening credit unions. The Bureau only has one director and lacks the complete picture of the cost of regulatory burden on credit unions. One way to achieve a better understanding of credit unions is to have a commission that includes someone with credit union experience. Requiring the CFPB to disclose how information about consumers is shared promotes the goal of consumer protection and gives credit unions a role to play in member data protection.

H.R. 2446 - The Responsible Consumer Financial Protections Regulations Act of 2013/ H.R. 3193 - The Consumer Financial Protection Safety and Soundness Improvement Act Lead Sponsors: Rep. Spencer Bachus (R-AL)/ Rep. Sean Duffy (R-WI) Co-sponsors: H.R. 2446, 15 cosponsors; H.R. 3193, No cosponsors Last Action: Both bills were Ordered to be Reported on 11.21.13

The Credit Union Small Business Jobs Creation Act

Prepared by CUNA Legislative Affairs

February 2014

(As of 02.12.14)


What are the Policy Issues? Did You Know? Credit unions have been making member-business loans (MBLs) since their inception in the early 1900s. In the first 90 years of their existence, there was no cap on business lending. The current cap was imposed by Congress in the Credit Union Membership Access Act of 1998 (CUMAA) and limits most credit unions to lending no more than 12.25% of their assets to small businesses without any economic, safety and soundness or historical rationale. Credit unions could lend an additional $13 billion to small businesses, helping them create over 146,000 new jobs in the first year after enactment if Congress increases the statutory cap on credit union business lending. This can be done without costing the taxpayers a dime and without increasing the size of government. Credit unions do not need taxpayer assistance to encourage them to do more business lending; credit unions only need authority from Congress. Our Ask: Congress should enact the Credit Union Small Business Jobs Creation Act (H.R. 688/S. 968) which would allow well-capitalized credit unions operating near the business lending cap to increase their business loan offerings to 27.5% of total assets, if they receive approval by the NCUA. This approach has been endorsed by the Obama administration.

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America’s small businesses are the engine of growth of our nation’s economy. The recent financial crisis has affected all types of lending, resulting in a reduction in the availability of business credit. America’s small businesses could create more jobs, if they are given access to more capital. Credit unions can provide them with $13 billion in additional capital. Credit unions have demonstrated that they can do small business lending safely, and they stayed in the game when other lenders pulled back. o Credit union loan losses (net charge off rates) for business loans are much lower than those for business loans made by banks. o At a time when banks are withdrawing credit from America’s small businesses, credit unions have actually Business Loan Growth been expanding credit to small businesses. The credit Since the Beginning of the Recession unions with the most business lending experience are (12/07-09/13) approaching the cap, threatening this growth. (Source: FDIC , NCUA and CUNA) 65.0% Credit unions hold just 6.2% of all small business loans at depository institutions. It took credit unions 100 years to reach this share of market. Even if credit unions were to double their market share in the future that would still leave banks with an incredible 88% share.

What are the Implications for Small Businesses? Prepared by CUNA Legislative Affairs

February 2014 -13.8% Community Banks (< $1 Billion)


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The average credit union business loan is approximately $217,000, meaning that credit unions are generally going to the underserved market of smaller-small businesses. Therefore, when a credit union lends to one of its business-owning members, the capital can be used to keep the business competitive and hire additional employees – up to 146,000 people nationally. Credit unions have a strong history of better lending, and will do better than the banks’ failed efforts to help small businesses, all without any cost to the taxpayer. Approximately 500 credit unions are currently constrained by or actively managing the cap. The cap restricts some credit unions from continuing to help small businesses participate. In some cases, this means credit unions that stood with their members during the financial crisis have turned them away during the recovery, because they are at or approaching the cap.

H.R. 688/ S. 968 – Credit Union Small Business Jobs Creation Act (As of 02.12.14) Lead Sponsors: Rep. Ed Royce (R-CA)/ Sen. Mark Udall (D-CO) Co-sponsors: 117 including Carolyn McCarthy (D-NY)/ 17 including Susan Collins (R-ME) Florida: Reps. Brown, Castor, Grayson, Hastings, Miller, Posey, Wilson; Sen. Nelson Last Action: Introduced in House 2.14.13/ Referred to Senate Committee 5.16.13

The Need for Capital Reform What are the Policy Issues? • •

Capital is king for all financial institutions. As credit unions battered by the financial crisis recover in the coming few years, rebuilding capital ratios will be paramount. While the credit union movement as a whole remains very well capitalized, a number of credit unions are close to or past the PCA triggers as a result of the financial crisis. These credit unions will need to raise capital at a time when the outlook for credit union net income – the source of retained earnings – is not particularly strong.

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February 2014


What is Supplemental Capital? Did You Know? Credit unions are the most highly regulated and restricted of all insured financial institutions. By law – not regulation, as is the case for other insured depositories – credit unions must maintain a 7% net worth (or leverage) ratio in order to be considered “well capitalized.” The law also specifies that only retained earnings constitute net worth for credit unions that are not designated low-income credit unions. All other U.S. depository institutions and most credit unions in other countries are permitted various forms of alternate or supplemental capital. Credit unions will soon be subject to a new risk-based regulatory capital requirement of 10.5% in order to be considered “well-capitalized”. The National Credit Union Administration supports allowing credit unions to access additional capital. Our Ask: Congress should modify the definition of credit union net worth to include supplemental forms of capital for credit unions which are consistent with credit unions’ cooperative structure.

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Supplemental capital is a tool that will help well-managed credit unions, large and small, meet their members’ demand for affordable financial services. Under H.R. 719, NCUA would ultimately determine what forms of supplemental capital may be offered but it could take many forms including voluntary or mandatory membership subscriptions or a subordinated debt type instrument. Supplemental capital will be required to meet the suitability requirements and consumer disclosure protections established in H.R. 719 and will not convey ownership to the investor.

What are the Implications for Credit Unions? •

Long term influences on credit union net income are not promising. Net interest income, essentially the difference between what credit unions earn in interest on loans and investments and what they pay in interest and dividends on savings has been on a long-term downtrend caused by intense competition on both sides of the balance sheet. This pressure is unlikely to abate significantly going forward. In addition, interchange income, an important source of noninterest revenue, is under political pressure and is likely to diminish. Without access to supplemental capital, and with earnings power facing headwinds, credit unions and their members will face a protracted period of reduced member service, disadvantageous member pricing and very slow growth, unless Congress allows credit unions to access supplemental forms of capital.

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February 2014


Supplemental credit union capital will reinforce and strengthen the regulatory incentive for credit

Did You Know? Over the past several years credit unions have experienced a dramatic increase in the number of demand letters they are receiving from non-practicing entities (NPEs). These firms, commonly referred to as “patent trolls,” acquire large numbers of obscure or dormant patents and then blanket an industry with demands for licensing fees. Credit unions are often forced into settlements, while those who do not comply face expensive litigation. Our Ask: Support legislation that diminishes the predatory practices of patent trolls, particularly in the area of curbing demand letter abuse, lessening impediments to appeal frivolous infringement allegations, and requiring stronger indemnification policies for end-users. CUNA, in coordination with a coalition of financial trade associations, has issued letters of support for S. 1720, authored by Sen. Leahy (D-VT); S. 866, authored by Sen. Schumer (D-NY); S. 1612, authored by Sen. Hatch (R-UT); and H.R. 3309 authored by Rep. Goodlatte (R-VA).

unions to remain exceptionally safe and sound, and, will allow credit unions to do even more to serve all their members. This would benefit all credit unions whether they use the authority or not. H.R.719 - Capital Access for Small Businesses and Jobs Act Lead Sponsor: Rep. Peter King (R-NY) Co-sponsors: 47 including Brad Sherman (D-CA) and Mike Michaud (D-ME) Alabama: Rep. Bachus; Florida: Reps. Castor, Hastings, Miller, Posey, Wilson Last Action: Introduced in House 2.14.13

(As of 02.12.14)

Ending Patent Troll Abuse What are the Policy Issues? •

Credit unions who choose to fight erroneous patent claims must appeal to the Patent & Trademark Office (PTO), often at a very high cost that is out of reach to most. The filing fee alone for a Section 18 proceeding (the process at the PTO to challenge these false allegations out of court) starts at $30,000 per case. This amount is simply to have the case considered. It does not include the potential hundreds of thousands or even millions of dollars in attorneys’ fees. Credit unions in almost all cases are considered “end-users”, meaning they purchase a product from a technology service provider and then conduct regular business with the use of this product. Because it is rare for technology providers to voluntarily step into a suit and stand in the place of their customers, credit unions are being threatened with demand letters, simply for purchasing a product from another manufacturer for use in regular business operations. Credit unions support fair use of the patent system and understand that patents are necessary for innovation and technological progress. Congressional efforts to reform the patent system to

Prepared by CUNA Legislative Affairs

February 2014


prevent trolls from frivolous law suits should take into consideration legitimate patents and ensure that those claims are able to be enforced.

What are the Implications for Credit Unions? • • •

Strong bipartisan support and swift House passage of H.R. 3309 illustrates the importance of this issue. Commonsense legislation that has been brought forth by leaders in the House and Senate will act as a good first step in addressing and ultimately curbing these predatory practices. Every dollar spent combating frivolous litigation or settling to avoid it, is a dollar credit unions can’t spend on services to their members. As not-for-profit financial cooperatives, the costs credit unions incur are directly borne by their members. If legislation is not enacted to curb the abusive practices of patent trolls, beginning at the demand letter stage, credit unions will remain easy targets and will be forced to continue spending member resources on invalid patent claims and frivolous litigation.

H.R. 3309/ S.1720 - The Innovation Act/ Patent Transparency and Improvements Act of 2013 Lead Sponsors: Rep. Bob Goodlatte (R-VA)/ Sen. Patrick Leahy (D-VT) Co-sponsors: 16 in the House; 3 in the Senate Alabama: Rep. Bachus Last Action: Passed House by voice vote/ Committee on the Judiciary. Hearings held. S. 866 - Patent Quality Improvement Act of 2013 Lead Sponsor: Sen. Charles Schumer (D-NY) Last Action: Referred to the Senate Judiciary Committee S. 1612 – Patent Litigation Integrity Act of 2013 Lead Sponsor: Sen. Orrin Hatch (R-UT) Last Action: Referred to the Senate Judiciary Comittee

Interchange and Payments

Prepared by CUNA Legislative Affairs

February 2014

(As of 02.12.14)


What are the Implications for Credit Unions and Consumers? Did You Know?

Debit interchange rates, routing and exclusivity were addressed by the Durbin Amendment in the DoddFrank Act of 2010. The debit rate regulation became effective in October 2011 and the debit routing and exclusivity regulations became effective in April 2012. In August 2013, in NACS v. Federal Reserve, a federal judge determined the Federal Reserve implementing regulations were inconsistent with the law. The Federal Reserve is appealing this decision. Pending appeal, the regulations remain in effect. The D.C. Circuit Court heard oral arguments on the appeal on January 17, 2014. Credit interchange is the subject of a large class action settlement announced in July 2012. The court approved the settlement on December 13, 2013. The settlement included a cash payment of $6.05 billion that will be distributed to merchants who remained in the class based upon an allocation formula that was approved by the court. The settlement also includes, among other things, a modification of MasterCard and Visaâ&#x20AC;&#x2122;s no surcharging rules to permit surcharging of credit transactions if specific conditions are met, and a short-term reduction in credit interchange for 8 months. The court retains jurisdiction over the settlement through July 2021.

Our Ask:

Debit interchange is vital to credit unions. Even though the Durbin language contained an exemption from the regulated debit rate for small issuers, it did not contain an exemption with regard to routing and exclusivity. Close attention must be paid to the trends in debit rates and routing to determine if the exemption is effective in protecting small issuers, or ineffective to the point where small issuer revenue per transaction decreases, resulting in the inability of credit unions to competitively offer services to serve and protect their members. Since credit interchange was recently addressed by one of the largest settlements in U.S. history, further federal action (legislative or regulatory) is unnecessary.

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Credit unions receive interchange income from debit card programs and credit card programs. Interchange income enables credit unions to provide competitive services to consumers. Without sufficient revenue from card programs, credit unions will be unable to provide competitive cards to consumers.

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Despite the small issuer exemption, credit unions are experiencing a decrease in debit interchange income per transaction according to data provided by the Federal Reserve.

Prepared by CUNA Legislative Affairs

February 2014


A recent study found that the Durbin amendment will ultimately cost consumers more than $22 billion (University of Chicago Law School, November 2013, “The Impact of the U.S. Debit Card Interchange Fee Regulation on Consumer Welfare: An Event Study Analysis.”).

What’s Next? •

Debit card litigation: The D.C. Circuit Court will issue a decision in NACS v. Federal Reserve case in mid-2014. The future may hold more rulemakings and more appeals.

Credit interchange settlement: The settlement is final in federal court. The appeals process is underway.

Payments are evolving at a rapid pace, with mobile payments as a key example. Credit unions are key in emerging payments because of their relationship with the consumer and their commitment to security, and therefore must be included in key discussions as the mobile payments market develops.

Prepaid cards are examples of the valuable services and products credit unions provide to their members. Existing laws and regulations ensure effective consumer protections. Credit unions will closely monitor legislative and regulatory proposals addressing prepaid cards. Legislative proposals include disclosures and limits on fees. Possible regulatory proposals include disclosures, insurance, and extension of certain Regulation E requirements.

Surcharging: On the state level, merchants may seek changes in surcharging laws now that surcharging (under specific conditions) is possible for credit card transactions under the terms of the credit card interchange settlement. Surcharging is prohibited in twelve states (CA, CO, CT, FL, KS, ME, MA, MS, NY, OK, TX (expands surcharge prohibitions to debit and stored value cards) and UT). Merchants are challenging New York’s anti-surcharging law and have attempted to repeal surcharging prohibitions in ME, NY, and TX.

Prepared by CUNA Legislative Affairs

February 2014

Leg briefing gac  

http://www.lscu.coop/content/download/77139/917250/Leg_Briefing_GAC.doc

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