Credit Unions Experience Growth, But See Issues

Executives worry about rising interest rates, regulations and more

Local credit unions continue to prosper in a strong economy, but face a variety of challenges that include burdensome regulations, rising interest rates and adjusting to changes in the market for financial services.

Credit union executives also are keeping a close eye on Washington, where President Donald Trump is promising tax and regulatory relief for financial institutions and other businesses. (Credit unions are exempt from federal taxes.)

“It’s yet to be really seen what that means in our environment,” said David Leusink, chief executive officer of 4Front Credit Union in Traverse City.

Shortly after taking office in January, Trump ordered a freeze on all new and pending regulations from executive agencies. The National Credit Union Administration, which regulates credit unions, determined the freeze didn’t apply to its regulatory power, but said it will adhere to “the spirit“ of the freeze.

“A big issue for us is overregulation by the federal government,” said Greg Gurka, CEO of East Traverse Catholic Federal Credit Union in Traverse City. “There are so many more regulations to comply with than there were five or 10 years ago.”

Trump also wants to gut the Dodd-Frank Act, which credit unions, banks and other financial institutions complain is overly burdensome. The sweeping financial reform act was passed in 2010 following the failure of major Wall Street banks.

“Dodd-Frank took in a lot of institutions that didn’t cause the problems and we’re suffering for it,” Gurka said.

Credit union leaders are particularly incensed about the so-called Durbin Amendment in the Dodd-Frank Act. The amendment put price controls on the fees merchants pay to financial institutions to accept debit card transactions, known as interchange fees, and established costly routing requirements for these transactions.

Although smaller financial institutions are exempt from the price control provision, the Durbin Amendment has cost credit unions nationwide more than $1 billion since it took effect in 2011, according to the Michigan Credit Union League, which has called for the amendment to be repealed.

Dodd-Frank also has made it harder for borrowers to get home mortgage loans because of the extensive appraisals and documentation required, Gurka said.

Nevertheless, mortgage lending by credit unions has been robust. Lending volume by Traverse City credit unions for the first nine months of 2016 was up 12 percent from the same period in 2015, according to the latest figures from the Michigan Credit Union League.

“The housing market is pretty strong,” said Mary Beth Vandenberg, manager of Lake Michigan Credit Union’s Traverse City branch. “We’re doing lots of construction financing for new homes and additions, as well as second homes.”

But rising interests rates, combined with more regulations threaten to cool mortgage lending, Leusink said, especially if rates continue to rise this year.

“We’re in the first rising-interest-rate environment we’ve seen in nine years,” he said. “Mortgage rates are still the lowest they’ve been in several decades, but borrowers are becoming concerned about the size of the monthly payment. Some are being shut out of the market.”

The interest rate on a 30-year, fixed-rate mortgage in February was 4.25 percent, up from 3.625 percent in September. The rate increase boosted the monthly payment on a $200,000 mortgage by $72, according to Wendy Bamm, 4Front’s vice president of lending.

Leusink said the rate increases and new regulations on “low-dollar” loans for manufactured homes and other smaller dwellings are hitting a significant number of people living below the poverty line in the Traverse City area.

“There’s an inordinate burden on these borrowers because of Dodd-Frank,” he said.

Cybersecurity is another big issue for credit unions, although local credit union executives say they have so far avoided major data breaches.

“We do training with our employees and implement a lot of security measures to avoid these problems as much as possible,” said Karen Browne, CEO of TBA Credit Union. “We’re trying to stay ahead of the perpetrators.”

Credit card fraud continues to plague credit unions that issue them, Gurka said. While security-chip-embedded credit cards help, too many merchants still can’t process them. And the cards offer no extra security for online transactions.

“The criminals are getting smarter every day,” he said.

Meeting the changing demands of the market also is challenging credit unions, Browne said.

“There’s a need for improvement in electronic services and technology, especially because of the way millennials do their banking,” she said.

Those 20-somethings would much rather conduct financial transactions through their smart phones, rather than visit a brick-and-mortar branch.

That requires credit unions to invest in technologies such as “remote deposit capture,” which allows members to take photos of checks and deposit them from mobile devices.

Browne said her credit union is experiencing growth in a variety of areas, including indirect lending through auto dealers and retailers for such things as cars, boats and, yes, bicycles.

“Bicycle loans are a popular thing in Traverse City,” she said.

Vandenberg said one of her biggest challenges is explaining what a credit union is and what services it can provide.

Credit unions were started more than 150 years ago as a way for specific groups of people of modest means, such as teachers or church members, to serve their saving and credit needs.

But most credit unions are now open to anyone and provide a wide array of financial services.

“It has really opened up,” Vandenberg said. “We spend a lot of time getting the word out that we can do everything banks do and explaining our philosophy.”