May 28, 2012 | last updated June 5, 2012 9:59 am
FINANCIAL SENSE

Regulatory burden triggers credit union merger

Small community banks have been raising red flags about too much government regulation hurting their ability to operate.

But they aren't the only financial institutions crying foul.

At least one Connecticut credit union CEO says new, more stringent oversight is becoming overwhelming.

Barton Werner, the CEO of The Hartford Postal Employees Credit Union, says it has become increasingly difficult for his tiny $10 million credit union to keep up with all the different regulations coming from policymakers and regulators.

With just three employees, they don't have the resources to stay on top of the changes, so he and his board of directors recently decided they can no longer go it alone.

Werner said his credit union has reached a deal to merge with the much larger American Eagle Federal Credit Union. With almost 100,000 members and $1.4 billion in assets, American Eagle has the resources to absorb the constant regulatory changes and offer customers more services, Werner said.

The deal is awaiting regulatory approval.

"We are too tiny with all the regulations," Werner said. "We looked at getting out before it got too overwhelming."

Werner is not alone in his frustration.

Earlier this month, officials from the National Association of Federal Credit Unions (NAFCU) went in front of Congress asking for relief from "an onslaught of compliance burdens," and urged passage of the Regulatory Accountability Act of 2011.

The proposal, NAFCU officials say, would make the regulatory process more transparent, agencies more accountable and regulations more cost effective for credit unions. It would require, for example, a cost-benefit analysis for any regulatory changes.

It's not clear if the proposal will gain support in Congress.

Carrie Hunt, NAFCU's general counsel and vice president of regulatory affairs, said the greatest challenge facing many credit unions is not any one new law, but the cumulative impact of the rapidly growing number of regulatory changes in the wake of the 2008 financial crisis.

Although nonprofit cooperative credit unions weren't responsible for the crisis, Hunt says, the industry is paying for it by being forced to follow new stringent regulations on lending, compliance and oversight. That includes regulatory changes coming from the Dodd-Frank Act, Consumer Financial Protection Bureau and the National Credit Union Administration, which is the industry's chief regulator. Even new rules and regulations from the Internal Revenue Service and Department of Labor are proving onerous, Hunt said.

"I think credit unions are drowning in regulatory burden," Hunt said.

Hunt said small credit unions in particular have the hardest time deciphering new rules because they don't have a large legal and compliance staff to sort through it all.

She said the extra rules and regulations are forcing many credit unions to hire more compliance staff and also change disclosures and software, which can cost thousands of dollars.

That chews up capital that can't be loaned out to borrowers. Of particular concern, Hunt says, are new requirements from the Dodd-Frank law that will change lending and disclosure requirements. The law is thousands of pages long and still needs a lot of the regulations to be written out, leaving credit unions in a state of uncertainty.

"It's going to be difficult to read and digest," Hunt said. "The regulatory burden has been building for years and it means more time spent on compliance."

Despite the tough environment for credit unions in recent years, there hasn't been a lot of merger activity in Connecticut, although the pace appears to be picking up so far this year.

In 2010 and 2011, there was only one merger in each of those years, according to the Connecticut Banking Department. So far in 2012, three deals have already been signed. The Hartford Postal-American Eagle deal is the latest transaction.

Besides pressures from the regulatory environment, Werner said the deal will give his customers access to services the small credit union hadn't been able to afford.

Dean Marchessault, executive vice president and chief operations officer at American Eagle, said the deal represents the first merger since American Eagle acquired Kaman Employees Federal Credit Union about 10 years ago. He said American Eagle is open to more deals in the future.

"The competitive environment has gotten more competitive and we think we would be a good partner," Marchessault said. "The welcome mat is out."

Other recent deals include the merger of Enbic Employees Credit Union of Simsbury with Windsor Locks-based 360 Federal Credit Union and Bridgeport-based Connecticut Energy Employees Credit Union with the $234-million Mutual Security Credit Union of Shelton.

Greg Bordonaro writes the Financial Sense column every other week. Reach him at gbordonaro@HartfordBusiness.com.

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