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The CFPB, Credit Unions and Fines

imageThe CFPB fined Navy Federal Credit Union $5.5 Million as a civil penalty for violations related to collection efforts and $23 million as compensation to members who were subject to collection efforts that were allegedly contrary to applicable regulations.   This got me to thinking, what is the purpose of CFPB fines?

Some would argue that the fines are a form of punishment.  “Make the bastards pay.”  The sentiment was widespread among many Americans after the financial meltdown when no one was held accountable.  I have to admit that the notion has some emotional appeal to me.  There are people who were bad actors and designed business models that preyed upon the public and deserve to face at least a fine for their egregious conduct.   However, I do not see Navy Federal Credit Union as a predatory institution that needs a dose of vigilante justice.   Navy has the heart and soul of a true credit union that cares deeply about the financial well being of its members.   Navy Federal Credit Union did not cause the last financial melt down and will not cause the next financial melt down.  They will never be on the “get-even” list.

Some would argue that fines are a deterrent to financial service providers to not repeat bad behavior.   The theory goes that if a bank is fined, that will cut into the profits and upset the shareholders who will take up their pitchforks and make the board and management behave better.   Even if you accept this reasoning, I don’t see how that theory applies to a credit union.   The irony of the Navy fine is that in its zeal to protect the members of Navy Federal Credit Union, the CFPB is taking money from the very members it says it is protecting.   All the money in credit unions belongs to the members.  There are no profits going to “fat cats.”  So if you fine a credit union, it is the members who pay.

And who says you need fines to modify the behavior of credit unions?  NCUA does it every day of the week in the supervisory process.  If the CFPB wanted to change Navy’s collection procedures without taking money from Navy’s members, all it had to do was to work with NCUA and the problem is solved; but that would not have made headlines.

Fines are also a means of accumulating power.   The CFPB is under increasing pressure from credit unions and Congress to exempt credit unions from many of its regulations.  By giving the biggest kid in the playground a public black eye, the CFPB helps to quash that argument. It is significant that the CFPB measures its effectiveness on the number of financial service providers it can catch and fine. Their fine numbers are their success sound bite.  The CFPB’s supporters in Congress quote the fine numbers all the time.  The fine numbers are used to justify the CFPB’s existence and importance.  At times it seems that they are in the fining business.

The imposition of crushing fines has a place if an institution is predatory or repeatedly acts with reckless disregard for the rights of the consumer.  However, an institution that has hundreds of employees who must follow an avalanche of new and sometimes contradictory regulations is bound to occasionally run afoul of some regulation.   Often institutions pay fines not because they think they are guilty but they make a business decision to settle an issue.  The CFPB’s “let’s shoot everybody and sort it out later” approach is designed to cow the financial services marketplace into the world-view of a small group of unaccountable people who run the CFPB.

A Filene Institute study found that between 2007 to 2012 credit unions in the United States had to increase their full-time compliance employees by 70% which is four times the increase of employees for other services.  They also found that over 50% of credit union mergers are motivated in whole or in part by excessive compliance costs.  The CFPB seems to be willfully deaf to the effect of their actions upon the costs of financial services to consumers and the reduction of choice of financial service providers.  There is no cost – benefit analysis in the rule making process.  While the CFPB has industry advisory groups, the regulation and enforcement decisions are made behind closed doors by a small group of people “on a mission.”  This has to change.

The government’s power to fine is a serious matter and should be used only as a last resort. If government abuses its power, our freedoms are in jeopardy and the governed will eventually rise up to demand changes.  A case in point occurred in Pennsylvania.  Fifty years ago most of the magistrates in Pennsylvania were non-lawyers who were not paid a salary.  Instead, they were paid a portion of the fines they assessed.   Guess what? There were a lot of fines assessed.  People did not respect the integrity of the system and the system was changed.   Now the magistrates receive a salary.  There is no incentive to declare a person guilty just to assess an excessive fine.   The magistrates got out of the fining business and into the fairness business.   A healthy financial services marketplace cannot be built upon a spider web of regulations that punishes providers in what is perceived as a “gotcha” philosophy.

In the PHH case, PHH followed the HUD RESPA guidelines in its conduct but the CFPB ignored the guidance and imposed a fine of over $100 million against PHH.  In striking down the fine, the court said the conduct of the CFPB was like a police officer who tells a person to walk across the street and then gives the person a ticket for doing so.  Did this really happen in America?

The CFPB will not be truly effective unless it changes its structure so that it is able to engage financial service providers in a positive and constructive discussion; with a carrot and not just a stick.  Having the buy-in and the consent of the governed is critical to success in a democracy.  If people think the process is fair, they accept and work within the system.   Working with financial service providers and not just against them will be much more effective for the consumer.  The political pressure against the CFPB will subside and the CFPB will not need to continue to use fines to justify themselves. Fines can be reserved for the egregious situations that deserve them.

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Guru

ABOUT THE AUTHOR: Guy A. Messick, The CUSO Guru, is an attorney with Messick & Lauer PC in Media, PA and General Counsel to NACUSO.  He can be reached at 610-891-9000 or guy.messick@gmail.com