Legislative & Regulatory Update

​John Alexander with an update on overdraft reforms; CFPB supervision of insurance; tax framework with ERTC changes; the latest stopgap funding bill; and a quick trip to Minot! 

by John Alexander, Director of Legislative & Regulatory Affairs

It may be freezing right now in the Dakotas, but things are always “heating up” in Washington, DC, especially as we try to keep abreast of the many changes, challenges, and implications for credit unions in the current climate with our legislators. Today, I have a snapshot of some of the latest developments.

Overdraft Reforms: Impact on credit unions amid new CFPB rules.
 Here's something that's stirring the pot in the financial world: The Consumer Financial Protection Bureau's (CFPB) recent overhaul of overdraft rules is making waves, but not for everyone. It's a big moment, particularly for the larger players among America's financial institutions, including those credit unions that have grown beyond the $10 billion asset mark. From April to November 2022, the count of such credit unions rose from 19 to 21 out of the total 5,019, signaling a notable shift.

The CFPB is cracking down on a loophole from 1968, bringing overdraft loans into the ambit of consumer protections under the Truth in Lending Act. This move, part of a larger initiative to weed out "junk fees," is reshaping the approach to fee management across banks and larger financial institutions.

Take Navy Federal Credit Union, for example. With $165.2 billion in assets and a 13 million-strong membership as of July 2023, it's a giant among credit unions. Such sizable financial institutions now find themselves navigating the terrain of these new regulations, primarily designed for banks holding assets over $10 billion.

Under the new guidelines, these larger financial institutions have a decision to make regarding overdrafts. They can either classify them as credit line loans, bringing them under full consumer credit protections, or continue to offer them as a courtesy service with fees that reflect actual costs or comply with predetermined benchmarks.

Turning the lens to America's credit unions, especially the larger ones, there's a strong objection to categorizing certain fees as "junk." These institutions, distinctive in their not-for-profit and member-owned ethos, reinvest their earnings back into benefits for members. This includes lower loan rates and higher returns on savings. Their fee structures, including those for overdraft services, are therefore aligned with their commitment to serving members' financial well-being, not profit generation.

For larger financial institutions in the Dakotas, this regulatory update signals a need to reassess their overdraft policies and fees. While smaller institutions might not be directly impacted, the move towards greater transparency and fairness in fee structures is influencing the broader industry's dynamics.

This presents an opportunity for innovation in overdraft protection among these larger entities, potentially leading to more transparent, equitable, and consumer-friendly offerings. As the CFPB moves forward with finalizing these rules, it's important for these larger institutions to actively participate in regulatory discussions, ensuring their specific needs and structures are adequately represented.

This period of transition presents both challenges and opportunities for credit unions to reaffirm their commitment to serving their communities' financial needs responsibly and ethically.

Biden's veto on CFPB's small business lending rule stands after Senate vote.
President Biden's veto of legislation aimed at overturning the Consumer Financial Protection Bureau's (CFPB) Section 1071 small business lending rule, commonly known as the 1071 Rule, has been upheld. The U.S. Senate's recent vote to override the President's veto failed, securing the survival of the controversial rule.

In late December 2023, the President vetoed a Congressional Review Act resolution passed by both the U.S. House of Representatives and the Senate. The House had voted 221-202 in favor, while the Senate supported it with a 53-44 vote. However, the Senate's recent attempt to override the veto fell short by a 54-45 vote, failing to meet the necessary two-thirds majority in both chambers.

Despite this development, the CFPB is currently blocked from implementing and enforcing the 1071 Rule due to ongoing legal challenges. Federal district courts in Kentucky and Texas have issued preliminary injunctions against the rule following lawsuits questioning its validity.

The heart of the legal debate centers on the CFPB's funding structure, which has been deemed unconstitutional by the U.S. Court of Appeals for the Fifth Circuit in the landmark case, Community Financial Services Association of America Ltd. v. CFPB. The Supreme Court, which heard oral arguments on this case on October 3, 2023, is expected to deliver its ruling by June 2024 at the latest.

Significantly, the Texas court has extended its preliminary injunction nationwide. This extension halts all compliance deadlines with the 1071 Rule for various financial institutions until after the Supreme Court's decision. Should the Supreme Court find the CFPB's funding constitutional, the CFPB will be required to extend compliance deadlines to account for the period of the stay. In contrast, the Kentucky court's order does not provide for such an extension.
In a related development, the Revenue Based Finance Coalition (RBFC), representing non-bank entities offering sales-based financing, has filed a lawsuit in a Florida federal district court. The RBFC argues that sales-based financing does not qualify as “credit” under the Equal Credit Opportunity Act and Regulation B, thus challenging the CFPB's authority to regulate it under the 1071 Rule.

As the judicial and legislative wrangling over the 1071 Rule continues, its fate remains uncertain, leaving credit unions and other financial institutions in a state of limbo. The credit union community, along with other financial stakeholders, is keenly observing these developments, which will have significant implications for small business lending practices nationwide.

Clarifying CFPB Supervision of Insurance.
America’s Credit Unions wrote Senate Banking Committee Ranking Member Tim Scott and Senator Joe Manchin to offer support for their bipartisan Business of Insurance Regulatory Reform Act, which would help to ensure that the CFPB does not expand its authority under the Consumer Financial Protection Act. The bill would amend the Consumer Financial Protection Act to revise the authority of the CFPB over activities regulated by a state insurance regulator and exempt the business of insurance from overview by the bureau.

In the letter, Jim Nussle, president/CEO of America’s Credit Unions, stated, “The Business of Insurance Regulatory Reform Act would provide needed clarity to ensure that states’ right to regulate insurance is explicit. Your legislation is necessary because despite the CFPB exemption, there have been certain instances where the CFPB has seemingly overstepped its jurisdictional authority, which would create immense uncertainty.”
America’s Credit Unions and the Leagues support efforts to hold the bureau accountable.

Bipartisan tax framework with ERTC changes announced.
Legislators have announced an agreement on tax framework legislation, the Tax Relief for American Families and Workers Act of 2024. They are looking for potential avenues to enact the legislation this month, though its path forward is uncertain. The bill makes no changes to the credit union tax status but would alter the COVID employee retention tax credit (ERTC) that could affect participating credit unions. The legislation would end all ERTC claims after Jan. 31, more than a year earlier than the current deadline of April 15, 2025. The legislation also focuses ERTC penalties on consultants and promoters who took commissions and would extend the possibility of ERTC audits to six years. We are closely watching this proposal and will provide updates as they become available.

Stopgap funding bill to extend government to March.
The Senate has proposed an amendment that would extend government funding to March. Congressional leaders unveiled the bipartisan plan earlier this week that would extend 2023 funding levels as Congress continues to work on negotiations for 2024.

Agriculture, energy, water, and transportation funding, currently set to expire on January 19, would last until March 1, with the remaining spending bills, set to expire February 2, extended to March 8. As part of the agreement, the National Flood Insurance Program would also be extended until March 8. The bill will likely be considered this week under suspension of the rules, requiring a two-thirds majority of the chamber. We will continue to keep you updated on the government funding situation.

Are you using all the benefits of your DakCU membership?
Your Dakota Credit Union Association (DakCU) assists our member credit unions in finding cost-effective compliance solutions to help reduce regulatory and compliance burdens. In addition to the many dues-supported solutions available to our members, such as the compliance hotline, CU Policy Pro, and InfoSight, our Compliance Solutions hub is just a click away – connecting credit unions with many preferred solution providers, such as AffirmX, PayLYNXS, and RecoveryPro, just to name a few.

On the road again…
Earlier this week, I had the opportunity to join the Credit Unions United Chapter in Minot for their meeting and speak on behalf of the association. Despite the freezing temperatures, there was good attendance, and I jumped right into the current state of government funding and examined the intricacies of the bipartisan tax agreement. Key federal events of the week were also a focus, particularly the activities within various congressional committees.

I also addressed some potential defensive bills for the next session, which could include interchange, environmental, social, and governance (ESG) issues, bank sales, and acquisitions. Finally, I inquired about any specific needs arising from the ongoing government shutdown, particularly concerning their dealings with a sub-vendor named Doxim, which recently experienced a breach impacting statement notification and compliance matters. Other side discussions focused on topics such as service projects and programs, managing challenging team members, and tackling issues related to fraud.

On a personal note, following the meeting, I shared some of my background, coming from a small town in Texas, and I reflected on the unique pride people from North Dakota take in their small towns and high schools. This is a refreshing sentiment that deeply contrasts with the perspective I often found and experienced in Texas, which led to a broader observation about the wholesome and kind nature of the community here. I truly am happy and proud to be part of the credit union movement in the Dakotas!

Have a great week, and please don’t hesitate to contact me with any advocacy or regulatory concerns.