NAFCU Compliance Blog

Share Insurance After a Merger

Written by Steve Van Beek

One of the issues I covered during Wendesday's webcast was share insurance after a merger.  Part 745.2(f) of NCUA's Regulations provides the general framework.  

Granted, the issue isn't one that comes up all the time as there (1) needs to a merger or assumption and (2) there need to be members who were members of both credit unions that have now merged.  

Here is 12 CFR 745.2(f):

"(f) Continuation of separate share insurance coverage after merger of insured credit unions. Whenever the liability to pay the member accounts of one or more insured credit unions is assumed by another insured credit union, whether by merger, consolidation, other statutory assumption or contract: The insured status of the credit unions whose member account liability has been assumed terminates, for purposes of this section, on the date of receipt by NCUA of satisfactory evidence of the assumption; and the separate insurance of member accounts assumed continues for six months from the date the assumption takes effect or, in the case of a share certificate, the earliest maturity date after the six-month period. In the case of a share certificate that matures within the six-month grace period that is renewed at the same dollar amount, either with or without accrued dividends having been added to the principal amount, and for the same term as the original share certificate, the separate insurance applies to the renewed share certificate until the first maturity date after the six-month period. A share certificate that matures within the six-month grace period that is renewed on any other basis, or that is not renewed, is separately insured only until the end of the six-month grace period." 

Thus, the general rule from NCUA is that separate share insurance coverage applies for a six-month grace period.  Prior to the end of the grace period, the member may need to restructure their accounts to ensure their accounts remain fully insured.  If the member holds share certificates, there is extra flexibility built into the rules.  

If your credit union has recently gone through a merger or has plans to, be sure to review if you have members that belonged to both credit unions and determine if their share insurance coverage might be impacted.  

Have a great weekend!   

NCUA Board Materials; Know Before You Owe; CFPB Hearings; Webcasts

Written by Steve Van Beek

Below are a few tidbits for your Thursday morning.  

NCUA Board Meeting.  The NCUA Board is meeting today and the draft materials are usually available an hour prior to the Board meeting.  The agenda for the meeting is here.  The draft materials will be posted here shortly after 9 a.m. EST.  Update:  NCUA's website indicates the Board materials will be available after today's Board meeting.

Know Before You Owe.  The CFPB released the latest on its Know Before You Owe project to combine the TILA-RESPA disclosures.  The CFPB is continuing to work on the closing documents and is not yet at the proposal stage of the rulemaking process.  Feel free to send any comments you have to the CFPB directly or to NAFCU.  

Cordray Testimony.  The NAFCU Today had a great recap of Richard Cordray's testimony on Tuesday before a House Subcommittee.  Cordray will be testifying in front of the Senate Banking Committee next Tuesday, January 31st - so expect headlines to continue on the new CFPB Director.

Share Insurance Webcast.  Yesterday was our special 2-hour webcast on NCUA's Share Insurance Coverage.  If you missed the webcast, you can still purchase the on-demand version which is available for 12 months.  For a listing of our upcoming live webcasts and available on-demand webcasts, click here.             

Speech on Reg Burden; Reg D Comments; Share Insurance Webcast

Written by Steve Van Beek

Last Friday, Federal Reserve Board Governor Elizabeth Duke gave a speech to community bank presidents and indicated that regulators need to resist the urge to regulate using "one-size fits all" regulation and supervision.  

"I do believe in the community bank model and its future. Indeed, I believe there is a real place for the customization and flexibility that community banks can exercise to meet the needs of local communities and small business customers. Still, the disproportionate cost of regulatory compliance for smaller institutions is real. Financial supervisors must be vigilant in efforts to maintain financial system stability and ensure that consumers are able to understand their financial product choices, no matter where they choose to bank. However, as we and other agencies craft regulations to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and adjust supervisory practices to meet these priorities, I think we must avoid a one-size-fits-all approach to supervision."

While the speech was directed at community banks, there are clear parallels for credit unions who are facing increased regulatory compliance costs.  I continue to find it interesting that regulators talk about reducing regulatory burden when there is a 2,300 page elephant in the room mandating thousands of regulatory changes.  Every tweak and adjustment that stems from Dodd-Frank increases the regulatory burden.  For compliance officers, even the process of determining if a regulation applies to their credit union is a challenge with the current pace of regulatory change.

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In mid-December, NAFCU sent a comment letter to the Federal Reserve on Regulation D.  NAFCU emphasized the need to update the arcane transactional limitation requirements to reflect the modern environment.  Here is one paragraph from the letter:

"The current law is burdensome and confusing for depositors that wish to have unfettered access to their funds. It is unreasonable to expect consumers to understand and remember the arcane limits on the number and type of transfers that are allowed out of their savings account.  For example, under the current rule, transfers among the consumer’s accounts via online banking are limited; however, a consumer can make unlimited transfers via mail or by messenger. The rule is outdated and as a consequence, the restrictions on transfers are incoherent to even the most knowledgeable consumers. It would be helpful to consumers if the regulation was modified to reflect the current financial services environment."  

Updating the Regulation D transaction limitation requirements is a win-win as consumers obtain greater access to their funds and credit unions would need to spend less time and resources classifying and monitoring transactions.

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On January 25th, NAFCU will host a special 2-hour webcast on Share Insurance featuring yours truly.  The early-bird pricing ends at the end of day tomorrow - so you can save $100 by signing up today or tomorrow.  

We are going to be covering Share Insurance issues from a couple of different angles: 

• How Share Insurance is Calculated Per Account - Based on Ownership Type;
• Disclosure of Federally-Insured Status on Advertisements;
• Share Insurance Disclosure Requirements Where Credit Unions Take Deposits;
• How Mergers Impact Share Insurance Coverage;
• Options for Educating Members on their Share Insurance Coverage;
• NCUA's Share Insurance Calculator; and 
• Detailed Examples of Certain Accounts and the Amount of Insurance Coverage Available.

The full information is here.  Also, because this is a 2-hour webcast, NCCOs can earn 2 CEU credits.

Questions & Answers.  As usual, we'll be answering questions during the webcast.  Due to complex nature of share insurance questions - we'll also be posting a detailed Q&A document that will be available to attendees after the webcast.  If you are registered and have questions ahead of the webcast - please send them in (compliance@nafcu.org) and I'll try to add the issue into the presentation.  At a minimum, we'll include the question in our Q&A document. 

Member Education: Online Authentication; Savings Bonds; Share Insurance

Written by Steve Van Beek

A few recent NCUA Letters to Credit Unions have included information regarding member education.  Below are a few areas where credit unions have been encouraged to educate members - in addition to the required regulatory disclosures already provided.

Member Education for Online Authentication

The recent online authentication guidance included a section on member education.  Pages 7 and 8 of the guidance include information on educating members.  Below are two of the types of communications that are expected:

• An explanation of under what, if any, circumstances and through what means the credit union may contact a member on an unsolicited basis and request the member’s provision of electronic banking credentials; and
• A listing of institutional contacts for members’ discretionary use in the event they notice suspicious account activity or experience member information security-related events.  

The guidance does not mention how often or in what format this information should be provided.  This provides credit unions with some flexibility in communicating with members.  It is quite possibility that credit unions already provide some of this information to members on a regular basis as a fraud prevention tool.  If so, be sure include those efforts in your documentation for the latest FFIEC guidance.  

Savings Bonds - Reminder: No more over-the-counter savings bonds sales after 12/31/2011 

NCUA's Letter to Credit Unions 11-CU-15 on Changes to Savings Bonds included information on educating members.  Here is from the Letter:

"Educate members about the upcoming changes. Let your members know they will no longer be able to buy paper savings bonds at your credit union or by mail order.  You are also encouraged to refer members to www.treasurydirect.gov where they can purchase, manage, and redeem electronic savings bonds online.  Electronic savings bonds are secure and convenient to manage in a TreasuryDirect account, and your members will no longer have to worry about storing, misplacing, or losing paper savings bonds.  In addition, with a TreasuryDirect account, members can purchase electronic savings bonds as gifts and convert paper savings bonds to electronic ones."

In this situation, NCUA is simply indicating credit unions should make members aware of the change and their options going forward.  

Share Insurance Coverage

Going back to 2008, NCUA issued Letter to Credit Unions 08-CU-18 on educating members on share insurance coverage.  The 2008 letter was written during the uncertainty of the financial crisis.  However, the message should not be lost on credit unions - especially with the influx of new members coming over from banks who might not be familiar with the share insurance coverage provided by the National Credit Union Share Insurance Fund.  

Going Forward

As the CFPB begins to regulate, there will most likely be additional pushes toward member education.  Credit unions should continue their efforts to provide education to members through their websites, newsletters and statements to ensure members are informed.  

As your credit union provides education to your members, document your efforts.  The credit union might offer this education anyway, but it can also be useful to document compliance.  For example, if you credit union offers identity theft or fraud prevention workshops - be sure to include this information as part of your compliance efforts to meet the expectations of the latest online authentication guidance.  

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Programming Update:  NAFCU's offices will be closed on Friday, December 30th and Monday, January 2nd.  We'll be back blogging in 2012!  Have a Happy New Year!  

Noninterest-Bearing Disclosure; NCUA on IRAs; Interchange

Written by Steve Van Beek

The compliance deadline for the noninterest-bearing transaction account disclosure is Friday, June 24, 2011.  We have had a few questions about the language of the actual notice.  It is below: 

NOTICE OF CHANGES IN TEMPORARY NCUA INSURANCE COVERAGE FOR TRANSACTION ACCOUNTS

All funds in a “noninterest-bearing transaction account” are insured in full by the National Credit Union Administration through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to members under the NCUA's general share insurance rules.

The term “noninterest-bearing transaction account” includes a traditional share draft account (or demand deposit account) on which the insured credit union pays no interest or dividend. It does not include any transaction account that may earn interest or dividends, a negotiable order of withdrawal (“NOW”) account, money-market deposit account, and Interest on Lawyers Trust Account (“IOLTA”), even if share drafts may be drawn on the account. For more information about temporary NCUA insurance coverage of transaction accounts, visit www.ncua.gov.

The notice is located in 12 C.F.R. 745.14(c)(1) of NCUA's Regulations (the full Part 745 is here).   

Credit unions do not have flexibility to change the language of the notice itself.  The notice must remain as listed above.  However, credit unions could include supplemental information near the notice which discusses which accounts at the credit union are fully insured and, perhaps, informing members to see a credit union employee for more information.  

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NCUA issued Legal Opinion Letter 11-0241 which addresses the share insurance coverage of inherited individual retirement accounts (IRAs).  The letter indicates share insurance coverage could continue for an inherited IRA if certain conditions are met.  The letter also cautions about complex IRS issues that pertain to inherited IRAs.  If your credit union offers IRAs, this would be a good letter to pass along to whoever manages that process (which might be you!).  

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The Federal Reserve has set a time and date for an open Board meeting to finalize the Interchange regulation.  The meeting will take place at 3:30 p.m., Wednesday, June 29, 2011.  We may not know any more about the final rule between now and the 29th but this advance notice does indicate the Fed will finalize the rule at this time.  More info in the NAFCU Today.   

This and That: CIiCU; SCRA; NAFCU Comment Letters & Finals

Written by Steve Van Beek

The latest Current Issues in Credit Unions podcast is now available.  Rob Rutkowski does a great job with these monthly podcasts and both he and Katherine Weber will be down at NAFCU's Regulatory Compliance Seminar in late October to do a live taping of the podcast.  

Speaking of Seminar........the agenda for this year's Seminar is now out - take a look for yourself.  We also have time set aside for "Compliance Hot Topics" as we all know there is a good chance for some regulatory shenanigans between now and October.  During those sessions Sarah and I will cover some of the latest rules and guidance issued.

Also, keep in mind that anyone can attend: NAFCU member; non-member; attorney; consultant; vendor - you name it - we'd love to see you in Florida.  Diversity of background and viewpoints are terrific things.   

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A couple months back, Buckley Sandler delivered a webinar on SCRA issues.  The webinar and slides are here and might prove useful to review SCRA issues at your credit union in anticipation of increased scrutiny.

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NAFCU has sent a couple of comment letters to NCUA recently.  One was our comment letter on Incentive-Based Compensation and the other our comment letter on NCUA's Proposed Voluntary Prepayment plan.

Our Regulatory Affairs team was also busy publishing Final Regulations on the Noninterest-bearing Transaction Account rule and the NCUA's Accuracy in Advertising rule.  NAFCU Members can access those Finals and others here.  

Footnote 4's Impact on NIBTAs; Text of NIBTA Notice

Written by Steve Van Beek

Am I the only one who is sick of writing and saying "noninterest-bearing transaction accounts?"  It seems there are more unanswered questions in this new rule than there are answers.  And less than 21 total days before the effective date of June 24, 2011.  

One issue that we have seen is credit unions wondering if their accounts meet the definition of noninterest-bearing transaction accounts (NIBTAs) because they have a clause in their disclosures (and bylaws).

The model clauses in Appendix B to NCUA's Truth in Savings regulation includes this language:

"The credit union reserves the right to require a member intending to make a withdrawal from any account (except a share draft account) to give written notice of such intent not less than seven days and up to 60 days before such withdrawal.

Note: This disclosure is limited to federal credit unions with Bylaws containing this limitation. See Standard Federal Credit Union Bylaws, Art. III, section 5(a). Similar disclosures are required of any state-chartered credit unions having similar limitations in their bylaws, or under state law. This limitation does not directly relate to the “number” or “amount” of transactions, and accordingly, may not be necessary under §707.4(b)(5), but would, if applicable, be required by §707.3(b)."

So, the question is: Does this mean our accounts are no longer noninterest-bearing transaction accounts because we reserve the right to require advance notice of withdrawal?  

NCUA tucked the answer into Footnote 4 of their final rule.  NCUA indicates this reservation is an administrative requirement and does not impact the determination of whether the account meets the definition of a noninterest-bearing transaction account.  Here is Footnote 4:

"4 The NCUA Board does not believe the general provisions of Article III, Section 5(a) of the Federal Credit Union Bylaws, or other similar provisions, affect the definition ofnoninterest-bearing transaction account or the share insurance coverage of this kind ofaccount. Article III, Section 5(a) of the bylaws states that with respect to memberwithdrawals from share accounts, the federal credit union’s board of directors has theright, at any time, to require members to give up to 60 days written notice of intention towithdraw the whole or any part of the amounts paid in by members. The NCUA Boardconsiders this a broad, administrative provision that does not alter the nature of anaccount that otherwise satisfies the definition of a noninterest-bearing transactionaccount."  76 Fed. Reg. 30251. 

So - these accounts would be noninterest-bearing transaction accounts even though the credit union has reserved the right to require advance notice of withdrawals.

*** 

I just wonder what would happen if a credit union put the discussion of a main issue in the footnote of the preamble to a Federal Register document!  If you are thinking "unfair and deceptive" - we are on the same wavelength.

As an extra bonus, guess what happens when this rule is published in the Electronic Code of Federal Regulations (12 C.F.R. 745.1(f))?  If you guessed - the footnote is nowhere to be found - you are two for two.    

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If you are looking for the exact text of 745.14(c)(1) notice, the language has been posted in the Electronic Code of Federal Regulations.  You are looking for the language starting with the capitalized letters and going through "www.ncua.gov."  There was not any font or size requirements included in the final rule.  I think credit unions would want to follow the "clearly legible" standard used for other notices.

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Extra Friday Bonus:  If you are wondering where you have heard of a prominent Footnote 4 before (and you wanted to bat 3-for-3 going into the weekend) - check the comments to the blog by clicking through the title of this blog post.  

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Super Geeky Footnote 4 Reference.  I still sometimes lose sleep over a different Footnote 4.  The one from a 1938 United States Supreme Court Case - United States vs. Carolene Products Co.  304 U.S. 144.  Wikipedia entry here.

During a Constitutional Law exam, one essay question was simply (I'm paraphrasing but not shortening):

"Explain Footnote 4 of Carolene Products as it relates to Constitutional Powers and Limitations." 

I don't remember what I wrote, but I don't think it was pretty.  Did I mention my professor was the one who wrote the Constitutional Law textbook we were using?  Ouch.  

Have a great weekend.

The Second Disclosure for Noninterest-bearing Transaction Accounts

Written by Steve Van Beek

We have had quite a few questions related to the final rule for noninterest-bearing transaction accounts.  I wanted to highlight one - when the second disclosure would be required - because the final rule doesn't provide a good example.  My Tuesday blog post also did not fully discuss this issue (that post has been updated).  

The language in 12 C.F.R. 745.14(c)(2) is as follows:

"(2) If an insured credit union uses sweep arrangements, modifies the terms of an account, or takes other actions that result in funds no longer being eligible for full coverage under this section, the insured credit union must notify affected members and clearly advise them, in writing, that such actions will affect their share insurance coverage." (emphasis added).

Thus, if the credit union takes an action that would result in certain accounts no longer being fully insured - the credit union would need to notify these members.  The notice would need to inform the members that their accounts will no longer qualify for unlimited share insurance coverage.  NCUA addresses this in preamble to the final rule:

"The second notice requires insured credit unions to notify members individually of any action they take to affect the share insurance coverage of funds held in noninterest-bearing transaction accounts. Although this second notice requirement continues to be mandatory in the final rule, it is noteworthy that NCUA does not impose specific requirements regarding the form of the notice. Rather, NCUA expects insured credit unions to act in a commercially reasonable manner and to comply with applicable state and federal laws and regulations in informing members of changes to their account agreements."

This notification is different than the Section 745.14(c)(1) notice that must be posted on the credit union's website and in its branches.  This second notice needs to be sent when the credit union takes an action.  What kind of action?

The proposal to the new regulation includes the best example I've found:

"Under the proposed notice requirements, if an insured credit union modifies the terms of its account agreement so that the account may pay dividends, the insured credit union must notify affected members that the account no longer will be eligible for full share insurance coverage as a noninterest-bearing transaction account. Though such notifications would be mandatory, the proposed rule does not impose specific requirements regarding the form of the notice. Rather, NCUA would expect insured credit unions to act in a commercially reasonable manner and to comply with applicable State and Federal laws and regulations in informing members of changes to their account agreements." (emphasis added). 

In this example, the credit union beginning to pay dividends on the account means the account no longer meets the definition of "noninterest-bearing transaction account" and would no longer be fully insured.

In short, this second disclosure would be required when the credit union takes an action which results in an account losing its unlimited share insurance coverage.  In those situations - such as when the credit union starts to pay dividends on the account - the credit union would need to notify those account holders in writing that their accounts are no longer fully insured.  Those accounts would then be insured under NCUA's regular share insurance rules because they would no longer be "noninterest-bearing transaction accounts." 

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Have a wonderful, long holiday weekend!  See you Tuesday.  

NonInterest Disclosure Deadline; NCUA Webinars; Consumer Compliance Outlook

Written by Steve Van Beek

On Tuesday, I blogged about the new regulation on noninterest-bearing transaction accounts.  Yesterday, the final rule was published in the Federal Register which starts the clock on the "30-day window" before the rule becomes effective.  Compliance with the new rule is required by June 24, 2011 (30 days after notice in the Federal Register). 

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NCUA Webinars.  In addition to NCUA's webinar today (May 26) on Voluntary Prepaid Assessments, NCUA will be hosting a separate webinar on Allowance for Loan and Lease Losses (ALLL).  The ALLL webinar begins today (May 26) at 2 p.m. EST and will be followed at 4 p.m. by the Voluntary Prepaid Assessment's webinar.

NCUA does archive their webcasts, so if you are looking for additional Troubled Debt Restructing (TDR) information you may want to review NCUA's January 6, 2011 webinar on TDRs.      

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Consumer Compliance Outlook.  Today is also the day of the Philadelphia Federal Reserve's free webinar on the Fed's Regulation Z Proposal on Ability to Repay for Mortgages.  The webinar starts at 2 p.m EST.  These webinars are usually archived so you can still catch the webinar at a later date.  The slide deck for today's webinar is here.

The Consumer Compliance Outlook also provides a quarterly newsletter that focuses on issues related to Federal Reserve regulations.  The First Quarter 2011 Newsletter is here and includes a Regulatory Calendar of proposed and finalized rules by the Federal Reserve.  They also have a handy "Index by Topic" which lists past articles they have written.    

NAFCU Members:  Our Regulatory Alert on the Ability to Repay proposed rule is now available.

NonInterest-Bearing Transaction Accounts; Dodd-Frank Webcast

Written by Steve Van Beek

Last Thursday, NCUA finalized a rule to fully insure, until December 31, 2012, noninterest-bearing transaction accounts.  The underlying requirement for this rulemaking comes from Section 343 of Dodd-Frank.  The actual insurance coverage is already effective but NCUA's rule defines "noninterest-bearing transaction account" and requires credit unions to provide notice of the temporary insurance.

Insurance is Separate.  NCUA clarified this unlimited insurance for noninterest-bearing transaction accounts (or nondividend-bearing transaction accounts for FCUs) is separate from, and in addition to, the member's share insurance coverage for other accounts.  NCUA included this example:

"[I]f a member has a $225,000 share certificate and a no-dividend share draft account with a balance of $300,000, both held in a single ownership capacity, he or she would be fully insured for $525,000 (plus dividends accrued on the share certificate), assuming the member has no other single-ownership funds at the same credit union." 

This result occurs because the $225,000 share certificate is insured under NCUA's normal share insurance rules (insured up to $250,000 in total for all individual accounts).  The $300,000 no-dividend share draft account is also fully insured - even though it is an individual account - because the unlimited share insurance for these accounts is separate from, and in addition to, other accounts at the same credit union.  This unlimited coverage for these accounts will expire after December 31, 2012, unless extended by Congress.    

Disclosure and Notice Requirement.  Credit unions that offer noninterest-bearing transaction accounts need to provide a disclosure in the lobby of its main office, in each branch and on their websites.  The language of the notice will be located in 12 C.F.R. 745.14(c)(1).  Until the rule is published in the Federal Register (and subsequently included in the Code of Federal Regulations), you can see the disclosure requirements here (page 15-16).

There is a second notice required if the credit union uses sweep arrangements.  If your credit union offers these types of arrangements, the second notice would need to be provided to any members utilizing those types of products.  Pages 5-6 of the rule describe and define these arrangements.

Update on 05/26:  This second notice would also be triggered if the credit union takes action that changes the account in a way that impacts the share insurance coverage.  An example would be if the credit union started to pay dividends on the account - which would remove the account from the unlimited share insurance coverage because it would no longer be "noninterest-bearing." 

Effective Date.  This rule will become effective 30 days after it is published in the Federal Register.  We will update you with that final date, but credit unions that offer noninterest-bearing transaction accounts should begin to prepare for their disclosures right away.    

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Shameless plug alert:

Dodd-Frank Webcast.  On June 2, NAFCU will have a webcast highlighting the provisions of Dodd-Frank that will impact credit unions.  Ted Dreyer of Wolters Kluwer will provide an update on implementation of Dodd-Frank regulations and upcoming deadlines.  And, of course, no discussion of Dodd-Frank would be complete without analyzing how the CFPB will impact credit unions.  You can save $100 by signing up by Thursday, May 26.