COLUMBUS, Ohio—Plenty of credit unions talk about the cost of compliance, but few know the exact figure. But one credit union here does.
Pathways Financial Credit Union is reporting compliance is costing it 22 BPs of ROA annually, accounting for 10.68% of the CU’s $8.9-million operating expenses or $947,300.
The $216-million Pathways Financial here came up with the numbers after participating in—and winning—the CU*Answers Cost of Compliance contest. The contest challenged CUs to meticulously analyze their operations and create line items for each compliance cost, and then produce a template others can follow.
“We did this because we really wanted to know what are our costs for compliance,” said President Greg Kidwell. “You can say compliance is a huge cost, but until you really figure it out, you don’t know. And then when you do, you are shocked at how much of your operating expenses are devoted to compliance.”
Fewer Funds To Serve Members
Kidwell said quantifying the costs shows how “regulatory overreach” in the last five years is stealing dollars away from funds that would be used to serve members.
Jim Vilker, VP of professional services at the Grand Rapids, Mich.-based CU*Answers, said that without knowing these costs credit unions cannot effectively argue for regulatory relief. “Some kind of dollar total for credit unions must be shared with Washington,” which is a longer-term objective of the contest, he added.
Vilker said he hopes the wining templates—second and third-place winners were also selected—can lead to a standard across credit unions for addressing and sharing compliance cost totals.
“I know it may be like chipping away at a rock,” said Vilker, “but you have to start somewhere. The generality that compliance costs are forcing credit unions to merge or go out of business could be quantified to our legislators and regulators and potentially force them to take action, or provide some kind of assistance. If we say compliance is killing us, we have to start getting proof of how it’s hurting us.”
Kidwell’s CU won phase one of the CU*Answers contest, which ended in October, 2014. Phase two concludes in June, when winners will be chosen based on those that demonstrate the most effective use of the winning templates. The contest is sponsored by AuditLink, CU*Answers’ compliance division.
Small CUs Hardest Hit
Acknowledging that the growing compliance burden is hitting small credit unions hardest, Vilker noted that by tracking compliance costs CUs can identify individual items they can focus on and strategize on how to lower the expenses.
Vilker said what stood out about Pathway’s winning entry is its precision and how the CU adapted the template to its operations. “You have to take into account the overt, or hard, costs and then the covert costs, such as employee time to read the new rule, figure out policy…”
Kidwell said determining expenses related to employee time was the most difficult part of the exercise.
“We went through our data and said how much time do our tellers and our loan officers, for example, dedicate to compliance.”
Out of about $2.6 million in annual salaries, Pathways determined that $417,307 went to compliance-related work, the single highest compliance cost category. The next largest expenses were IT-related costs ($316,487) and software ($295,487).
Substantial ROA Loss
The loss of 22 BPs of ROA “changed our ROA substantially,” pointed out Kidwell, saying he recognizes how these kinds of costs can cripple small credit unions.
Kidwell contends the templates will help credit unions become more efficient with compliance-related expenses, even smaller CUs. “However, I do realize small credit unions don’t have as much room to move. They have a smaller labor pool and limited resources. There is only so much a small credit union can do before it starts turning its back on the membership to do all this back-office work.”
Vilker thinks the data can even help during conversations with examiners.
“Let’s say NCUA comes in and says your ROA is 20 basis points below peer, or earnings are not as strong as they should be. Then you cite that your cost of compliance over the last six months is costing you at least 20 BPs of ROA. Let the agency see the pressure increased regulation is putting on the business.”