NAFCU Compliance Blog

What Made Consumers Complain to the FTC in 2017?; ICYMI – Amended 1098 Forms Due Tomorrow

Written by Shari R. Pogach, Regulatory Paralegal

Earlier this month, the Federal Trade Commission (FTC) published the 2017 Consumer Sentinel Network Data Book, a database compilation of the nearly 2.7 million reports it received by the Consumer Sentinel Network from consumers on problems experienced in the marketplace.   Although the number of consumer complaints decreased from 2.98 million in 2016 to 2.68 million in 2017, reported losses to fraud were $905 million in 2017, $63 million more than in 2016.  The top three categories reported were: 1) debt collection at 23 percent; 2) identity theft at 14 percent; and 3) imposter scams at 13 percent.

Credit card and tax fraud were the most common type of identity theft reported.  As to imposter scam complaints, consumers reported losing $328 million.  Nearly one in five people lost money at a $500 median loss.  Examples of imposter scams involved someone pretending to be a government official, a technical support expert, a relative in distress or a well-known business to get the consumers to give up their money. Wire transfer continues to be the most widely used form of payment with 70 percent of consumers reporting the scammers contacted them by phone.

New this year, the FTC's data book provides details on fraud losses by age groups.  Interestingly enough, more people in their twenties than those over age 70 reported losing money to fraud.  Those aged 20-29 reported money fraud losses in 40 percent of reports versus people aged 70 and older in 18 percent of their complaints.  However, when older adults lost money the median dollar amount lost was higher than any other age group.  For example, the median reported loss for people age 80 and older was $1,092 compared to $400 for those aged 20-29.

The median dollar loss from all reported types of fraud in 2017 was $429.  The highest losses were in these fraud categories:  travel, vacations and timeshare plans at $1,710; mortgage foreclosure relief and debt management at $1,200; and business and job opportunities at $1,063.  Military consumers reported losing the most money to imposter scams costing them nearly $26 million.  Identity theft was the largest category reported by military consumers and their median fraud loss of $619 was more than 44 percent higher than the general population.

The FTC data book provides national statistics, a state-by-state listing of the top report categories in each state and a listing of the metropolitan areas that generated the most complaints per individual.  Florida, Georgia and Nevada were the top states reporting fraud in 2017.  Michigan, Florida and California had the most identity theft reports per individual.  The FTC has also developed a mini site to make the information in the data book more accessible for the public, for example there is a webpage provided for each state. 

Take a look at what folks in your area were complaining about in 2017.  The more you know, the better you are able to help them hang on to their hard earned money.

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ICYMI – Amended 1098 Forms Due Tomorrow. Back in January, we blogged on a few tax items including that a bill was pending that might extend certain income tax deductions that had expired for 2017 such as the private mortgage insurance (PMI) deduction. As we blogged a few weeks ago, on February 22, 2018, the IRS issued guidance clarifying that lenders are required to amend their Form 1098 and send amended forms by March 15, 2018. Specifically, Form 1098 must now reflect PMI paid in 2017:

https://www.irs.gov/forms-pubs/reporting-mortgage-insurance-premiums-mip-treated-as-qualified-residence-interest-through-december-31-2017

The Instructions for Form 1098 and General Instructions provide guidance on amending Form 1098. 

Mind if I ask a favor, my credit-worthy friend? / New IRS Guidance

Written by Reginald Watson, Regulatory Compliance Counsel

Greetings! A little while ago, Stephanie blogged about the perils of being a non-member and the limited rights of nonmember joint-account owners. But do these rights extend to nonmembers in the case of co-applicants on a loan? In this day and age of hyper-connectivity and transient travel, credit unions can stand to lose some business if potential borrowers were not permitted to solicit help from a slightly more credit-worthy friend with the unfortunate reality of falling outside of the credit union's field of membership. This blogpost will address the permissible roles nonmembers can play in the loan application process. 

The Federal Credit Union Act provides credit unions with the power to make loans to its members, to other credit unions, and to other credit union organizations. Similarly, the FCU Bylaws require that federal credit unions may only extend loans to members. In response to questions about where exactly nonmembers fit in, the NCUA states in Legal Opinion Letter 2000-0605 that "nonmembers may participate in loans as long as their involvement does not distort the direct lending relationship between the FCU and the member." The NCUA General Counsel has also previously discussed similar issues in legal opinion letters 95-0616 and 94-0424, presenting a laundry list of synonymous sounding terms (such as joint-applicant, co-borrower, co-maker, co-signer, endorser, guarantor, etc.) that can become a bit head-scratching to navigate. The NCUA Examiner's Guide may help sort things out:

"The terms co-maker, co-borrower, co-signer, guarantor, and joint applicant sometimes create a degree of confusion. In general, these terms refer to one of two possible parties, either a co-maker or a co-signer.

A co-maker shares equal responsibility with the borrower for payment of the loan and receives an equal benefit in the loan proceeds, or access to future advances in an open-end loan. Regulation B (202.7(d)(1)) identifies a co-maker as a joint applicant and the resulting loan as joint credit.

A co-signer takes on liability for the obligation of another person without receiving goods, services, or money in return or, in an open-end credit obligation, without receiving the contractual right to obtain extensions of credit under the obligation. Credit unions request a cosigner’s signature as a condition for granting a member credit or as a condition for forbearance on collection of a member’s obligation in default.

(…)

The co-maker shares in the loan proceeds and bears joint liability for repayment. Thus, a credit union cannot make a loan to a nonmember co-maker. However, a credit union may permit a nonmember to sign a loan, provided the nonmember does so in the capacity of a guarantor (cosigner), rather than a loan recipient (co-maker.)"

NCUA Examiner's Guide, Chp. 10 at page 39.

So there you have it. It appears that co-makers are required to be members, whereas nonmember friends can be co-signers. After all, that's what friends are for!

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IRS Issues Guidance on Mortgage Insurance Premiums and Home Equity Loan Deductions

Despite fears to the contrary, the deductions for interest paid on home equity loans and for private mortgage insurance were mostly preserved in the recent Tax Cuts and Jobs Act (TCJA) and corresponding tax extenders bill. The IRS issued new guidance earlier this week on the deduction for home equity loans as well as the deduction for mortgage insurance premiums. The Instructions for Form 1098 and General Instructions provide guidance on amending Form 1098. For additional information, we recently blogged about some of the major components of TCJA that affect credit union operations. Until next time compliance friends!

The Circle of Life: Federal Considerations for Member Decedents

Written by: André B. Cotten, Regulatory Compliance Counsel

Hello Compliance Friends! Over the holidays, I had a chance to relax, travel and check out some old and new films. One of my favorite movies will forever be Disney's The Lion King. The death of Mufasa will forever pull at my six-year old heart strings.  Today's blog will talk about what to do when Mufasa Member finds himself in a wildebeest stampede and the circle of life suddenly closes.

As compliance practitioners, I am sure that you are aware a lot of these issues would need to be discussed with your local counsel because they directly involve state law issues. However, I have highlighted some NCUA specific and federal law issues that may serve as helpful reminders. I have segmented this post according to subject areas for your convenience.

Accounts

The FCU Model Bylaws contain the following provision with regard to keeping a deceased member’s account open. You may want to review your credit union’s bylaws for a similar provision.

“(d) The share account of a deceased member (other than one held in joint tenancy with another member) may be continued until the close of the dividend period in which the administration of the deceased's estate is completed.” 12 CFR 701, App. A.

(emphasis added)

The bylaws do not address closing an account and re-opening a new one. On the other hand, an account held in joint tenancy can remain open. If it is determined that the joint tenant is not a member in his/her own right but within the credit union's field of membership, then the person would need to become a member so that the credit union would not impermissibly be offering services to a nonmember.Note, insurance may end six months after death of a member unless the account is restructured

Moreover, after a member dies, the credit union still has the responsibility to protect member funds and information. To begin, under many states' laws, absent a named beneficiary, the funds of the account are a part of the deceased member’s estate. Therefore, a credit union may need to avoid releasing the funds until the qualified representative of the estate has been named by a court or according to the applicable state’s probate laws. 

Account information is considered non-public personal information and therefore cannot be disclosed without providing an opt-out notice, unless the disclosure falls under one of the exceptions. Note, non-public personal information may be disclosed to a person holding a legal or beneficial interest relating to the member, and to persons acting in a fiduciary or representative capacity on behalf of the member.

Lastly, before closing a member account, the credit union may want to proceed with caution. Depending on its respective policy, the credit union may want to flag on the account that the owner has died, and then allow a period of time for any surviving owners or the member's estate to take ownership of the matter. The documents needed to close an account will depend on state law, the account agreement and the credit union's internal policies and procedures.

Tax Issues

To begin, one concern from a federal perspective is that having continued tax reporting of a member's social security number after the person's death can cause tax complications. Although, this may not always be possible if Mufasa Member dies later in the tax year. IRS Publication 559 contains an overview of issues involving deceased persons, and while aimed at executors of estates, has some helpful information about Form 1099.

In addition, the credit union should note that a discharge of indebtedness under a settlement agreement between a credit union and a debtor or a debtor's estate is an "identifiable event" that triggers the obligation to file Form 1099-C.  The instructions for Form 1099-C may be accessed here.

Loans

With regard to credit, the credit union's options would be determined by state law, the loan agreement, and the specific situation. Often, if the decedent was the only borrower, the credit union could be looking at making a claim against the estate.  Even though someone may be making loan payments, unless they are contractually obligated to make those payments, the credit union may want to see if an estate has been established (or if there’s some other claim that should be made, for example, if the member had life and disability insurance under which a claim could be made).  Absent a will, state law will determine the disposition of the decedent’s assets to heirs, including vehicles and real property. Often, heirs have to decide if they want to keep an asset (and likely refinance the loan), or if they want to sell the asset to pay off the credit union’s loan, etc.

In regards to mortgage loans, a lot of mortgages include due-on-sale clauses which allow the lender to call the loan upon the death of the borrower; however, there are situations in which a due-on-sale clause cannot be exercised – for example, if the property is transferred under joint tenancy.

This is the section of NCUA’s rules and regulations that references due-on-sales clauses.  Note the general prohibition on exercising a due-on-sales clause where property is transferred on the death of a joint tenant or tenant in the entirety, or transferred to a spouse or children, as discussed in 12 CFR 701.21(g)(6). Overall, this is a fact specific analysis that the credit union may want to review with local counsel.

Special Issues

There is a rule that Social Security benefits are not paid for the month that Mufasa Member dies. Here is the Social Security Regulation:

Ҥ404.311 When does my entitlement to old-age benefits begin and end?

[…]

(b) We will find your entitlement to old-age benefits ends with the month before the month you die.”

This seems unfair and actually legislation has been introduced in the past on this topic but the way the rule is written, even if a member dies on the last day of a month, the member is not entitled to Social Security benefits for that entire month. Here is an excerpt from a Social Security guide:

“If the deceased was receiving Social Security benefits, you must return the benefit received for the month of death or any later months. For example, if the person dies in July, you must return the benefit paid in August. If benefits were paid by direct deposit, contact the bank or other financial institution. Request that any funds received for the month of death or later be returned to Social Security. If the benefits were paid by check, do not cash any checks received for the month in which the person dies or later. Return the checks to Social Security as soon as possible. However, eligible family members may be able to receive death benefits for the month in which the beneficiary died.”

There is guidance with regards to check reclamations specifically. The Social Security Program Operations Manual has a section on electronic funds transfer reclamations and a section on check reclamations.

The Department of Treasury’s Green Book  also addresses check reclamations more specifically including how to reply to a "Notice of Reclamation" and when there may be a right to protest.

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As I previously mentioned, when the circle of life closes on a member, there are numerous state law issues that are implicated, and a credit union will need to consult with local counsel to determine how best to draft and modify its policies. However, there are some NCUA and federal law issues that are implicated when a member dies, and credit unions will need to maintain policies that strike a balance between state law, federal regulations, and the business needs of the credit union.

Editor's Note: As helpful insight from a blog reader, I added information about NCUA's 6-month grace period for decedent accounts. I modified this post on Friday, January 19, 2018 to provide a more through legal analysis and to be a more complete resource for NAFCU's members.

Tax Reform Questions; Programming Note

Written by Brandy Bruyere, Vice President of Regulatory Compliance

On December 15, 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). NAFCU advocated for credit unions' interests all year while tax reform was high on Congress' agenda, and the credit union tax exemption remained intact, even with the substantial reforms to the tax code. However, the TCJA did make some changes impacting credit unions. NAFCU put together a summary of these changes that may help folks in various areas of your credit union, but here's a few questions the NAFCU compliance team has been receiving from members.

What happened to the home equity interest deduction?

One of the changes in the TCJA that has caused confusion relates to the extent that interest paid on "home equity" loans is deductible. Some news outlets reported rather generally that home equity interest is no longer deductible under the TCJA, but it seems to be more complicated than that. The tax code distinguishes between "acquisition indebtedness" and other "home equity indebtedness." Of note, loans that a borrower takes out to "substantially improve" a property fall into the "acquisition" category, so it seems this home loan interest will remain deductible. However, a loan that accesses home equity for other purposes, such as to finance the purchase of a vehicle, would not be deductible through 2025.

Do we have to pay excise tax on certain compensation?

Another change is that credit unions will be subject to an excise tax on compensation in excess of $1 million. This will apply to an organization's top 5 highest paid employees – although that group can, over time, actually include more than five employees because that "club," so to speak, has permanent membership. If an employee is in the top five paid staff in 2018, but falls out of the top five in 2019, that person is still categorized as "top five" under the code. The rate for this excise tax is the corporate tax rate, which is 21% under the TCJA.

"Compensation" means pay that is reportable in box 1 of an employee's W-2 and for which there is not a "substantial risk of forfeiture" of that income. From talking to credit unions, it seems that some deferred compensation from 457(f) plans vests in one single year, which is where some credit unions may have staff that reach this $1 million threshold. Others have a different vesting dates which can help manage to what extent compensation may exceed that $1 million threshold, since the year the deferred compensation vests is the year it is counted as compensation for purposes of these rules. Also of note, distributions from 457(b) plans and 401(k) plans are excluded from this threshold.

The TCJA also removes an exemption from excise taxes for non-profit institutions relating to certain excess parachute payments to any employee that is "highly compensated" under the IRS definitions for qualified plans, which is a salary of $120,000 or more in 2018. Apparently these payments are those made when an employee leaves the organization, and equal or exceed three times the employee's annual salary.

NAFCU is reaching out to the IRS to discuss the need for guidance and clarification with the implementation of these provisions.

Related Note – Private Mortgage Insurance

The deduction for private mortgage insurance expired on December 31, 2016. Many credit unions are in the process of providing the data needed to produce 1098 forms for members by the end of the month in order to comply with IRS reporting requirements. The TCJA did not extend the PMI deduction, but a bill was introduced in Congress to extend some deductions, including the PMI deduction. If passed, PMI paid in 2017 could become deductible. While NAFCU's Legislative Affairs Team sees support for this bill on Capitol Hill, Congress is tackling some issues that are very politically charged, such as immigration and border security. The bill could pass, but perhaps not in time for credit unions to meet the January 31 deadline for 1098 reporting.

NAFCU called the IRS helpline for 1098 reporting and confirmed that so long as the law does not allow the deduction of PMI, this box should not be completed on the 1098. However, if Congress were to pass a bill making PMI deductible for 2017 at a later date, the IRS may issue guidance on how to proceed but helpline staff stated that one likely outcome is that 1098 reporters may need to file amended 1098 forms to reflect PMI paid in 2017. The IRS will update www.irs.gov/Form1098 as the situation develops.

Programming Note - Martin Luther King Jr. Day

NAFCU's offices will be closing at noon on Friday and all day on Monday in recognition of Martin Luther King Jr. Day on January 15th. We will be back to  blogging on Wednesday, January 17th.

Changes to Foreign TIN Collection Requirements for IRS W-8BEN Form

Written by Stephanie Lyon, Regulatory Compliance Counsel

Back in January 2017, The IRS made a few modifications to its Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting for Individuals (W-8BEN form). This form is filled out and returned to credit unions by individual nonresident aliens who are the beneficial owners of an amount subject to withholding. Sources of income that non-resident members may receive from the credit union subject to withholding can be dividends. This is why many credit unions try to obtain a W-8BEN form when a nonresident member opens a share savings account.

While NAFCU Compliance team does not have expertise in tax law, we thought it may be helpful to highlight some of these changes as many credit unions serve international members. For more complex tax law issues, the credit union may want to consult with its tax attorney/professional. The IRS also has a hotline service that is free and available to tax reporting credit unions and may help answer questions on IRS regulations and guidance documents—1-866-455-7438.

The final rule implemented by the IRS requires that credit unions obtain certain information from individual nonresident aliens such as their foreign tax identifying number (TIN) and date of birth on a withholding certificate. See, Instructions for Form W-8BEN (Rev. July 2017). Here is an image of Part I to the form where this information can be recorded:

Beginning in January 2018, if a member does not have a foreign TIN the credit union will be required to obtain a "reasonable explanation" as to why this information was not collected. See, 82 Fed. Reg. 2051. So what exactly is a "reasonable explanation"? According to the 2017 instructions, a reasonable explanation for not providing a foreign TIN could be the following:

… a statement that you are not legally required to obtain a TIN in your jurisdiction of tax residence. The explanation may be written on line 6, in the margins of the form, or on a separate attached statement associated with the form. If you are writing the explanation on line 6, you may shorten it to “not legally required.” Do not write “not applicable.” In addition, if you are not using this form to document a financial account described above, you may provide the TIN issued to you by your jurisdiction of tax residence on line 6 for purposes of claiming treaty benefits (rather than providing a U.S. TIN on line 5, if required).

Under the IRS instructions, if a member is a resident of country that does not issue TINs (i.e. Cayman Islands, Bermuda and Montserrat), a reasonable explanation may look like this:

It is important for credit unions to understand this new requirement as the IRS makes the credit union liable for the withholding and collection of the tax. See, 26 U.S.C. § 1474(a). In the case that the requirements for waiver of withholding are not met, such as when a W-8BEN is not filled out or is improperly filled out, the credit union must collect the full 30 percent tax. 26 U.S.C. § 1472(a)(2). The instructions on the W-8BEN form states:

…Failure to provide a Form W-8BEN when requested may lead to withholding at the foreign-person withholding rate of 30% or the backup withholding rate under section 3406.

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I know IRS rules can be somewhat dry so I am sharing a picture of my younger sister (who is visiting from Spain for the rest of the summer) and the activities we did on our recent trip to NYC. We had incredible Italian food, saw Anastasia on Broadway and took every tour imaginable—all in 36 hours! Talk about enjoying every minute of the day…

Next week, I am taking her to Universal Studios in Orlando. We cannot wait to visit the Wizarding World of Harry Potter^TM where we will meet up with my older sister who's already scouted out the theme park for us:

The Scope of the Department of Labor’s Fiduciary Duty Rule – A Dragnet of Sorts

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Happy Monday to all of you out there in regulatory compliance land. Since our May 13, 2016 blog, we have received some questions from our members regarding whether the U.S. Department of Labor’s Fiduciary Duty Rule applies to credit unions. Since the rule is somewhat complex and guidance from the Department of Labor is still forthcoming, this blog breaks down some of the more apparent ways that credit unions can find themselves subject to the requirements of the rule.

Before diving into the rule, it is important to dispel a major misconception that may cause some confusion. NCUA has traditionally stated that federal credit unions may not act as broker-dealers in securities or provide investment advice of the type that would render them “investment advisers” under state or federal securities laws. See, NCUA Letter to Federal Credit Unions 10-FCU-03 (Dec. 2010) (broker-dealers); NCUA Legal Opinion Letter 09-0511 (June 3, 2009) (investment advisers). While the Fiduciary Duty Rule covers these types of activities, it also covers transactions and relationships that have traditionally escaped scrutiny under federal securities laws, including a significant number of transactions and relationships relating to individual retirement accounts (IRAs).

It is also important to note that not every communication will rise to the level of fiduciary investment advice. The requirements of the rule are triggered when an individual provides a “recommendation” regarding certain specified activities. The rule defines a “recommendation” as “a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” 29 C.F.R. § 2510.3-21(b)(1). Our May 13, 2016 blog discusses the exceptions to this definition, some of which are also provided below, including an exception for generalized marketing materials. All of that being said, here are some of the more common ways that credit unions may be subject to the Fiduciary Duty Rule.

Finder’s Fees. One of the most likely circumstances where a credit union might find itself owing a fiduciary duty to a member is if the credit union recommends an investment advisory CUSO to the member to either set up an IRA or create an employee welfare benefit plan (if the member is a business) and receives a finder’s fee or any other compensation from the CUSO for the referral. This is because the Fiduciary Duty Rule defines “investment advice” to include “a recommendation as to the…selection of other persons to provide investment advice or investment management services.” 29 U.S.C. § 2510.3-21(a)(1)(ii). The Department explained its rationale for this requirement in the preamble to the final rule:

The Department continues to believe that the recommendation of another person to be entrusted with investment advice or investment management authority over retirement assets is often critical to the proper management and investment of those assets and should be fiduciary in nature. Recommendations of investment advisers or managers are no different than recommendations of investments that the plan or IRA may acquire and are often, by virtue of the track record or information surrounding the capabilities and strategies that are employed by the recommended fiduciary, inseparable from the types of investments that the plan or IRA will acquire. For example, the assessment of an investment fund manager or management is often a critical part of the analysis of which fund to pick for investing plan or IRA assets. That decision thus is clearly part of a prudent investment analysis, and advice on that subject is, in the Department’s view, fairly characterized as investment advice. Failing to include such advice within the scope of the final rule carries the risk of creating a significant gap or loophole.

81 Fed. Reg. 20964, 20968 (Apr. 8, 2016). One thing to note is that under this new fiduciary duty regime, many traditional compensation structures used by financial institutions and investment advisory affiliates would be prohibited. In order to preserve some of these, the Department created the Best Interest Contract Exemption which was also published in the Federal Register on the same day as the Fiduciary Duty Rule. More details about this exemption are covered in our May 13, 2016 blog.

Recommending Rollovers. Another common circumstance where a credit union might find itself owing a fiduciary duty to a member is if the credit union recommends that the member rollover an existing IRA into a product offered by the credit union or recommend a transfer. This is because an individual is also considered to be providing “investment advice” under the Fiduciary Duty Rule if he or she makes recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, “including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made.” 29 C.F.R. § 2510.3-21(a)(1)(ii). The Department also explained its rationale with respect to this requirement in the preamble:

The Department continues to believe that decisions to take a benefit distribution or engage in rollover transactions are among the most, if not the most, important financial decisions that plan participants and beneficiaries, and IRA owners are called upon to make. The Department also continues to believe that advice provided at this juncture, even if not accompanied by a specific recommendation on how to invest assets, should be treated as investment advice under the final rule. The final rule thus adopts the provision in the proposal and supersedes Advisory Opinion 2005–23A. The advisory opinion failed to consider that advice to take a distribution of assets from a plan is actually advice to sell, withdraw, or transfer investment assets currently held in a plan. Thus, a distribution recommendation involves either advice to change specific investments in the plan or to change fees and services directly affecting the return on those investments. Even if the assets will not be covered by ERISA or the Code when they are moved outside the plan or IRA, the recommendation to change the plan or IRA investments is investment advice under ERISA and the Code. Thus, recommendations on distributions (including rollovers or transfers into another plan or IRA) or recommendations to entrust plan or IRA assets to a particular IRA provider would fall within the scope of investment advice in this regulation, and would be covered by Title I of ERISA, including the enforcement provisions of section 502(a). Further, in the Department’s view, recommendations to take a distribution or rollover to an IRA and recommendations not to take a distribution or to keep assets in a plan should be treated the same in terms of evaluating whether the communication constitutes fiduciary investment advice.

81 Fed. Reg. at 20964. Since many discussions regarding rollovers or transfers may begin at the teller line, this means that credit unions may want to consider what sorts of marketing strategies they employ when trying to offer these types of products to members. Furthermore, the fact that a credit union making a recommendation to rollover or transfer an IRA may be considered a fiduciary under the Department’s rule may require a larger conversation regarding what sorts of products are marketed to members through mailings or other publications and what sorts of products are offered at the teller line as part of a daily member-teller encounter.

Exceptions. As I discussed above, not every communication will subject a credit union to the requirements of the rule. For example, investment education services offered to a plan, plan fiduciary, plan participant or beneficiary, an IRA or IRA owner are not typically considered “recommendations” provided that they do not include investment advice regarding specific investment products. 29 C.F.R. § 2510.3-21(b)(2)(iv). General plan information; financial, investment, and retirement information; information about asset allocation models; and some interactive investment materials such as questionnaires, worksheets, and software typically fall within this exception. 29 C.F.R. § 2510.3-21(b)(2)(iv)(A)-(D). Therefore, credit unions that offer these services as a member service can continue to offer these types of education materials without being considered to have offered investment advice under either ERISA or the Code.

These are some of the more common ways that credit unions can become fiduciaries under the Department of Labor’s new rule. Luckily, the rule is not effective until next year so credit unions have some time to review compensation structures and arrangements now to determine how this rule will impact credit union operations and relationships with affiliates. The rule becomes effective on April 10, 2017.

 

 

FAQs: Welcome to Tax Season; 2016 Credit Union Legal Predictions

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Tax season is upon us. It’s time to re-read those form instructions and find those IRS.gov bookmarks in your browser. While tax law is complex and requires a high level of specialization, we have collected a selection of tax-related frequently asked questions to make your lives a little easier:

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When are marketing bonuses or incentives reportable to the IRS? What form should be used?

It depends on whether the bonus is paid in connection with a deposit account (e.g., a “bonus” under the Truth in Savings definition at 12 C.F.R. § 707.2(e)) or as part of some other incentive program.

The IRS defines interest as amounts paid for the use or forbearance of money, which includes amounts, whether or not designated as interest, paid on savings accounts and other deposit arrangements. See, Internal Revenue Bulletin No. 2000–28 (July 10, 2000). Under 26 U.S.C. § 6049, the IRS treats cash premiums paid with respect to opening accounts as interest which must be reported, if it aggregates to $10.00 or more a year. A 1099-INT would need to be issued for these payments.

Note the slight difference between the IRS threshold ($10 or more) and the NCUA’s de minimus rule regarding bonuses under Truth in Savings (more than $10). See, 12 C.F.R. Pt. 707, Appendix C, comment 707.2(f)-4. Where an incentive of exactly $10 is paid to open an account – it would not be a bonus under NCUA’s Truth in Savings regulation which would require disclosure – but it would be interest under the IRS rules and reportable on the 1099-INT.

Income that doesn’t meet the definition of interest under the IRS rules, such as loan incentives, are reportable as miscellaneous income on the 1099-MISC, if the reporting threshold is met. Under 26 U.S.C. § 6041, the payments should be reported if all miscellaneous payments to the member aggregate to $600.00 or more a year.

There is some disagreement about whether to report on a 1099-INT or 1099-MISC where an incentive is offered in exchange for contracting for multiple services. Credit unions might wish to speak with a tax professional to determine how to report such an incentive payment.

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We have some members that are tax exempt. Do we still need to send a 1099-INT for them?

A credit union is not be required to report interest or dividend payments (which are interest for IRS reporting purposes) made to an exempt recipient. This is an excerpt from the Instructions to Form 1099-INT:

“Exceptions to reporting. No Form 1099-INT must be filed for payments made to exempt recipients or to interest excluded from reporting.

Exempt recipients. You are not required to file Form 1099-INT for payments made to certain payees including but not limited to a corporation, a tax-exempt organization, any IRA, Archer MSA, Medicare Advantage MSA, health savings account (HSA), a U.S. agency, a state, the District of Columbia, a U.S. possession, a registered securities or commodities dealer, nominees or custodians, brokers, or notional principal contract (swap) dealers. For additional exempt recipients, see Regulations section 1.6049-4 for more information.”

These exemptions are codified in 26 C.F.R. § 1.6049-4(c)(1)(ii)(A)-(B).

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Can a credit union be held liable if an ACH payment of an IRS tax refund is sent to a wrong or fraudulent account?

The Department of Treasury hosts a website containing Frequently Asked Questions for financial institutions regarding direct deposit of IRS tax refunds. Among other information, it states that a receiving depository financial institution (RDFI) is not liable for IRS tax refunds sent to erroneous or fraudulent accounts when the IRS provided incorrect information. An RDFI may rely on the account number only, and is not required to match the name on the account. If the RDFI learns that the refund has been misdirected to the wrong account, it must notify the government of the error, and, while it is not required to return the funds, it is encouraged to do so if they are still available. For more detail, see the Treasury’s guide to federal ACH payments, referred to as the Green Book, Chapter 2, page 7.

NACHA has implemented an opt-in program to allow RDFIs to more easily reject refunds where the name mismatches the account or fraud is suspected. For more information about that program, consult the Treasury’s website.

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What should a credit union do if it receives a federal payment for a deceased member?

It depends on what kind of federal payment it is. Some federal benefits, such as social security benefits, are subject to reclamation and others are not. The Green Book, Chapter 5, page 4 contains a table identifying which payments are subject to reclamation.

As an example, the Social Security Administration requires that benefits be returned for the month in which the member died (which would be paid out in the subsequent month). This fact sheet gives some background. Chapter 5 of the Green Book provides detailed reclamation procedures and liability calculations.

On the other hand, IRS tax refund payments sent through the ACH network are not subject to reclamation. If a credit union receives a tax refund for a deceased member, it is not required to take any further action. See, U.S. Department of Treasury’s Direct Deposit of Tax Refunds FAQ website.

***

NAFCU members with additional questions this tax season should not hesitate to reach out to the Regulatory Compliance Team.

Kaufman & Canoles 2016 Credit Union Legal Predictions

The Winter 2016 issue of Kaufman & Canoles Credit Union Legal Update has been released. It makes six predictions for the legal concerns of credit unions in 2016. Have a look to see their predictions for medallion issues, class action litigation, foreclosures, TRID compliance, mergers and employment issues.

Changes to the 2016 Form 1098: Mortgage Interest Statement

Written by Victoria Daka, Regulatory Compliance Counsel

While credit unions complete tax reporting requirements for 2015, we thought it would be a good time to note that next year there will be changes to this process. A new law passed in July, 2015 included additional reporting requirements for credit unions that receive mortgage interest. Just to be clear, this will impact next year's reporting, as it applies to mortgage interest received in 2016.

To meet this law's requirements, the Internal Revenue Service added two additional reporting requirements and resized the 2016 version of Form 1098. Credit unions will be required to report mortgage insurance premiums in box 5. This still applies only where a borrower pays a credit union $600 or more in mortgage interest on any one mortgage during the calendar year. Second, credit unions must report the address or description of property securing the mortgage, the outstanding mortgage principal as of January 1, 2016, and the mortgage origination date. Additionally, Form 1098 has increased in size from a 3-to-a-page to a 2-to-a-page format.

Below is a summary from the Form 1098's 2016 instructions on the additional requirements:

“What's New

Mortgage insurance premiums. Report mortgage insurance premiums paid of $600 or more in box 5. Reporting is required under section 6050H(h).

New reporting requirements. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 contains new reporting requirements for recipients of mortgage interest. For forms 1098 issued to payers after December 31, 2016, you must report the address or description of property securing the mortgage, the outstanding mortgage principal as of January 1, 2016, and the mortgage origination date. 

Form resized. Due to the modification of reporting requirements by P.L. 114-41, sec. 2003, the official IRS Form 1098 has increased in size from a 3-to-a-page to a 2-to-a-page format, beginning with tax year 2016. The revised form can be found at www.irs.gov/form1098.”

The instructions for 2016 Form 1098 are available here. The revised form can be found here. Again, this is not for the 2015 tax year, but for any 1098 forms sent after December 31, 2016.

***
Also, as a friendly reminder, NAFCU is currently offering an early registration savings of $200 for NAFCU’s 2016 Regulatory Compliance School—but it ends today! Use code HOLIDAY by today, January 8 to save. Take a look at the agenda.

IRS Issues - Box 4 of 1098 & Truncated TINs Proposal; Credit Card Agreements to CFPB

Written by Steve Van Beek

Whenever I get a chance to talk to regulators directly, I make a point of explaining to them that credit unions are not able to focus solely on their regulations, even if they wanted to.  This morning's blog post is an example of that.  We've all been trying to keep up with the CFPB's final mortgage regulations, but there are plenty of other issues out there to stay on top of.  Plenty.  

***

MLO Compensation (and more) Final Rule.  Oh, and by the way, the CFPB's MLO compensation rule is finally out.  Cordray's remarks are here, the press release here, the summary is here, special regulation page here and the full rule is available here (541 pages).

Effective Date:  The majority of the rule is effective on January 10, 2014.  However, the prohibitions on mandatory arbitration and financing of credit insurance premiums are effective June 1, 2013.

*** 

Now, on to a few other items.

Mortgage Insurance Premiums & 1098s.  Throughout 2012, it was known that mortgage insurance premiums would not be deductible for tax year 2012.  But then the fiscal cliff legislation happened, and mortgage insurance premiums were made retroactively tax deductible and credit unions (and their vendors) scrambled to correct Box 4 of their 1098s.  The IRS issued Internal Revenue Bulletin 2013-3 which indicates that Box 4 - for mortgage insurance premiums - has been reinstated.  Additional information is available in the NAFCU Today.

IRS Proposal for Truncated TINs.  The IRS has been operating a pilot program since 2009 that allows certain filers to truncate Social Security Numbers and TINs on IRS information returns (more on the pilot program is available here).  On January 7th, the IRS proposed a regulation that would allow filers of certain information returns - including credit unions - to use a "truncated taxpayer identification number" (TTIN).  While this is only a proposal at this time, the feedback from the prior pilot program was overwhelming positive and it is likely that credit unions will have the option to use TTINs for next year's IRS information returns.  

Note: The proposal would not require credit unions to use TTINs.  But, you'd have the option.  

I wish other regulators took this approach.  In this situation, the IRS had been getting feedback from filers, consumers and organizations that TTINs would help protect nonpersonal public information and, potentially, reduce identity theft.  Not only did they listen to concerns, but they also proposed a rule that would make this change optional which would allow credit unions to make the transition when the time is right for their credit union (and their vendor).  

***

Credit Card Agreements Due January 31st.  Speaking of other regulators, credit card agreements are due to the CFPB by January 31st.  The underlying requirement comes from 12 CFR 1026.58(c).  These agreements need to be sent quarterly:  January 31st, April 30th, July 31st and October 31st.  I'd put those dates on your calendar if your credit union has over 10,000 credit card accounts.  For those under 10,000 credit card accounts, Section 1026.58(c)(5) includes a de minimus exception and you wouldn't need to send your agreements to the CFPB (there are still other requirements in 12 CFR 1026.58 that do apply).

The CFPB's Credit Card Agreement database is available here.  

Improvements Needed.  I'll note that the CFPB hasn't exactly made this quarterly submission process easy.  There isn't any information on their website regarding the process.  The emails the CFPB sends to institutions are sometimes late and the information is usually only sent to one person at the credit union (what happens if they left, are on extended leave or just on vacation?)  And, what happens when a credit union reaches the 10,000 threshold?  How do they learn the CFPB's process?  How do they get on the super secret "update your credit card agreement" email list?  

These are all issues that NAFCU has raised with the CFPB.  Hopefully we'll see changes in their process in the future to make it more transparent and easy to follow.  With all the other issues going on, this is one the CFPB should streamline to reduce the burden and confusion for card issuers.    

One Improvement:  One thing we have heard is that you should be able to include additional employees onto the CFPB's emails regarding the card agreement submissions.  Send them an email request asking them to add the additional email(s) whenever they send your credit union information on your credit card agreements.   

A Few Housekeeping Reminders to Start off the Year

Written by Bernadette Clair, Regulatory Compliance Counsel

Welcome back! We hope everyone enjoyed the holidays and good times with family and friends.

Before delving into the New Year, we thought it might be useful to consolidate some of our recent blog posts highlighting compliance deadlines that have come and gone over the last week, so they don’t get lost in the shuffle.

SAFE Act Housekeeping Reminders.  The SAFE Act renewal period expired on December 31, 2012.  Credit unions and their MLOs must renew their registration during the annual renewal period each year.  Independent testing for compliance with the SAFE Act and its implementing regulations is also required annually, and may be conducted by credit union staff or an outside party.

TAG/NIBTA – Expiration of Unlimited Share Insurance Coverage.  Congress did not extend the unlimited share insurance coverage for noninterest-bearing transaction accounts, so this temporary coverage expired on December 31, 2012.  NCUA Letter to Credit Unions 12-CU-14 details steps for credit unions to take, such as communicating the change in insurance coverage to your membership and making sure account disclosures properly disclose the level of insurance coverage.

Reporting Nonresident Alien Interest.  IRS final regulations that went into effect April 19, 2012, require credit unions to report interest of $10 or more in the aggregate, paid to certain nonresident aliens on or after January 1, 2013.  The first filing will be required in 2014, for the tax year 2013.

CFPB Website Reference for Credit Card Application & Account Opening Disclosures.  As of January 1, 2013, your credit card disclosures need to reference the CFPB (in the past they mentioned the Federal Reserve). When the CFPB republished Regulation Z , sections 12 CFR 1026.60 (applications and solicitations) and 12 CFR 1026.6 (account opening disclosures) were changed to reflect the CFPB's authority over Regulation Z and credit cards.

Updates to Adverse Action Notices and Risk Based Pricing Notices.  Also as of January 1, 2013, credit unions must ensure their risk-based pricing notices refer to the CFPB as the appropriate federal regulatory authority.  Adverse action notices must also be updated to reflect either NCUA’s Office of Consumer Protection (OCP) for federal credit unions with assets under $10 billion or the CFPB for those with assets of $10 billion or more.

Reporting Nonresident Alien Interest in 2013; Meet my Twins

Written By JiJi Bahhur, Regulatory Compliance Counsel

With the New Year right around the corner, I thought it would be fitting to remind you all of the IRS’s Nonresident Alien Interest requirements.  Although the final regulations were effective as of April 19, 2012, the rule applies to payments of interest made on or after January 1, 2013. 

The final regulations require credit unions to report interest of $10 or more in the aggregate, paid to certain nonresident aliens, for that particular year.  That means at the end of 2013, credit unions will be required to report interest paid on or after January 1, 2013.  Credit unions are only required by the regulations to report payments made to residents of countries listed in IRS Revenue Procedures 2012-24, which was published contemporaneously with the final regulations.  However, to alleviate potential burden, credit unions may choose in the alternative to report interest paid to all nonresident aliens rather than just those that are residents of countries found on the list.   

The regulations require that reporting is conducted using the same form that is currently used to report interest payments made to nonresident aliens who reside in Canada.  IRS Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” can be located here.   

As mentioned before, the IRS published a list of countries that require reporting to the IRS where the interest meets the $10 or more criteria.  A credit union may rely on the permanent residence address provided on a valid Form W-8BEN to determine the country of residence, unless the credit union knows or has reason to know that the documentation is unreliable.  

***

While I was out on leave, I received several emails asking about the birth of my twins – a boy and a girl.  Well, I’d like to introduce them to you all:  meet Kyse (rhymes with rice) and Ava, born August 20, 2012. 

Qualified Mortgages; Flood; Compliance Monitor; Fair Lending Webinars

Written by Steve Van Beek

Below are just a few quick items for your Friday - have a great weekend!

Qualified Mortgages.  The Consumer Financial Protection Bureau has reopened the comment period for their Qualified Mortgage rule (also known as the Ability-to-Repay rule).  The new comment period ends on July 9, 2012.  It had been expected that the CFPB would finalize this rule in early 2012 but it kept getting pushed back - with good reason as this rule has the potential to significantly alter the mortgage market - and now looks like it will be late 2012 before a final rule.  Dodd-Frank requires the rule in place by January 2013.  The CFPB's notice regarding the extended comment period is here. 

***

Flood.  A 2-month extension was passed and then signed by President Obama.  This extends the National Flood Insurance Program (NFIP) through July.

***

NAFCU's Compliance Monitor.  Our June 2012 issue of NAFCU's Compliance Monitor is now available for download by NAFCU members.  This month the articles focus on Reporting Interest Payments to Nonresident Aliens as well as the increased Focus on Fair Lending.

***

Fair Lending Webinars.  The Federal Reserve's Consumer Outlook Live series is hosting a June 21st webinar on 2010 Census Data - What it Means for CRA, HMDA and Fair Lending Compliance.  The webinar is free and follows on the heels of their November 2, 2011 - Fair Lending Issues and Hot Topics webinar (archived version available).   

CFPB Disparate Impact Bulletin; IRS Nonresident Alien Interest Requirement

Written By JiJi Bahhur, Regulatory Compliance Counsel

Fair Lending.  The Consumer Financial Protection Bureau (CFPB) is responsible for enforcing the Equal Credit Opportunity Act (ECOA).  As part of this responsibility, the CFPB recently issued CFPB Bulletin 2012-04 (Fair Lending) to provide compliance guidance on the fair lending requirements of the ECOA and its implementing regulation, Regulation B.   

The Bulletin puts lenders on notice that the CFPB will be monitoring for potential fair lending violations, including practices with unlawful discriminatory effects.  The CFPB reaffirmed its commitment to enforcing the ECOA, by recognizing the “disparate impact doctrine” as one of three recognized methods of proving lending discrimination under the ECOA.  The Bulletin further puts lenders on notice that lending policies with disproportionate, negative effects on a protected class (“disparate impact”) are illegal and will be pursued by the CFPB. 

For a background on Fair Lending and Reg B issues, take a peek at NAFCU's on-demand webcast (live broadcast was April 11th).  

***

IRS Reporting.  The IRS finalized a rule requiring financial institutions to report interest paid on or after January 1, 2013, to non-U.S. citizens of certain countries.  Alternatively, credit unions may report interest paid to all nonresident aliens.  The interest (the aggregate of $10 or more) paid to a nonresident alien should be reported on Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” for the calendar year in which the interest was paid. 

For a full reading of the rule, go here.  Revenue Proceeding 2012-24 is here - listing the countries covered by this new requirement.  

NAFCU Members:  Our Regulatory Affairs team has provided a Final Regulation on this issue (12-EF-04) that is available for download.    

Credit Unions & The Vow to Hire Heroes Act

Written by Quincy Enoch, Associate Director of Legislative Affairs & Military Liason

As you may know, last week, President Obama signed into law The Vow to Hire Heroes Act of 2011 (Heroes Act), which generally provides tax incentives for businesses to hire veterans. 

While federal credit unions are exempt from income taxation, the Heroes Act contains provisions that would enable a FCU to claim tax credits on certain payroll taxes.  Generally, the tax credit is a work opportunity credit.   FCUs, and other qualified tax exempt organizations, may claim:

• 26% (or 16.25% if the employee worked more than 120 hours and less than 400 hours) of the qualified first-year wages with a cap of:
  • $6,000 for veterans unemployed for more than 4 weeks but less than 6 months – Maximum credit of $1,560
  • $14,000 for veterans unemployed for more than 6 months – Maximum credit of $3,640
  • $24,000 for veterans with a service connect disability and unemployed for more than 6 months – Maximum credit of $6,240

The IRS tax form for claiming the credit is IRS Form 5884, but the current form will need to be updated to conform to the Heroes Act. 

To receive the credit, the employer must request and be issued a certification for each employee by a State employment security agency or execute and submit to the IRS a pre-screening notice.  The employer must receive the certification by the day the individual begins work or complete IRS Form 8850, the Pre-Screening Notice and Certification Request for the Work Opportunity Credit.  The IRS Form 8850 can be filled out and submitted up to 28 calendar days after the hire date.

A veteran will be treated as certified if: (1) such veteran is certified by a State employment security agency as being in receipt of unemployment compensation under State or Federal law for not less than 6 months during the 1-year period ending on the hiring date; or (2) the veteran is certified by such agency as being in receipt of unemployment compensation under State or Federal law for not less than 4 weeks (but less than 6 months) during the 1-year period ending on the hiring date.  The time period will determine the tax credit.  The legislation gives Treasury/IRS the authority to provide alternative methods for certification of a veteran. 

In calculating the tax credit, a tax exempt organization may only take into account wages paid to a qualified veteran for services in the furtherance of the activities related to the purpose or function constituting the basis of the organization's exemption.  In addition, the newly hired employee must work for at least 120 hours for any eligibility and 400 hours for full eligibility.  The potential employee must be a first time hire and cannot have been employed by the employer at any time in the past.  

If you have any questions, please feel free to contact Quincy Enoch at [email protected]

Health Care Tax Credit

Written by Carrie Hunt, General Counsel and VP of Regulatory Affairs

Normally when I see the word “tax” I try not to read any further, but I wanted to take a moment and make sure credit unions have investigated whether  they may be eligible for a small business heath care tax credit.  Credit unions can verify their eligibility on the IRS website.  The website details the following:

In general businesses are eligible for the credit if they meet the provisions below:

• Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
• Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
• Average annual wage. A qualifying employer must pay average annual wages below $50,000.

 The amount of credit a business can receive:

• Maximum Amount. The credit is worth up to 35 percent of a small business' premium costs in 2010 (25% for tax-exempt employers). On January 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers). 
• Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

Word of warning:

For the past two years some credit unions have appeared on an IRS list of tax-exempt institutions that had lost their tax exemption.  The credit unions could have appeared on that list for a number of reasons, but most of the issues were related to poor recordkeeping or administrative mistakes.  In order to claim the heath care tax credit, credit unions will have to file a form 990-T.  Since federal credit unions do not have to file a form 990 under normal circumstances, apparently there was a problem last year with federal credit unions filing the form and getting inadvertently put on a list of institutions who had lost their exemption since the IRS did not have the credit unions “on file” for having filed a 990 in any other year.  This problem is supposed to have been rectified for the 2011 filing year, by the addition of a new line item to the 990-T, but please take this into account if you decide to file for the tax credit.

******

Finally, I will close with a solution to a little conundrum that has been bothering me for years:  what to do with leftover Chinese food takeout rice.  I did not invent this recipe but will gladly take responsibility for foisting it on the credit union community.  Take 1 ½ cups rice, one egg and smash it all together with a generous pinch or two of salt.  Heat up a few tablespoons of butter over medium high heat, drop decent sized spoonfuls of the rice stuff into the butter and flatten down a bit to make pancakes.  Cook 3-4 minutes a side until golden.  Easy and good.  And cheap.  Three of my favorite qualities.   

CFPB; 1099; FDIC Complaints and Risk Management

Editor's Note.  Some of you had a difficult time opening certain links in yesterday's blog post. Here's my guess regarding what happened.  Many of you receive the blog post via email, and many email systems make it difficult to click on hyperlinks for security reasons.  If you had those problems yesterday, here's what I'd do.  Go to the actual blog post on the internet, which is here, and try the links again. Compliance peeps who had problems with the links in the email indicated to me that they were able to open the documents from the blog's web site. 

Posted by Anthony Demangone

Here are a few items of note...

The CFPB. Stories about President Obama appointing Elizabeth Warren to head the CFPB via a recess appointment seem to be gaining traction. (WSJ.com).   Also, the CFPB has issued what appears to be its first guidance document.   The guidance clarifies that the Dodd-Frank requirements found in section 1071 will not go into effect until the CFPB issues regulations.  And what did Section 1071 do?  It amended the Equal Credit Opportunity Act to require financial institutions to collect and report information concerning credit applications made by women or minority-owned businesses and by small businesses.

1099.  Ding-dong, this witch is dead.  (NAFCU Today.) For months, we chronicled how a small provision in the recent health care reform law amended 1099-MISC requirements in a way that would have placed a huge new burden on businesses – including credit unions.  Luckily, reasonable minds came to the rescue. President Obama recently signed legislation into law that repeals that provision.

FDIC Complaint.  Here's another great blog post from the Bank Lawyer's Blog.  This post analyzes claims made by the FDIC against the former directors and officials of failed banks.  Here's one portion of the post that caught my eye:

In the case of Corn Belt Bank, which failed in 2009, the FDIC found five loans that caused losses to the bank ("Loss Loans"), alleged that the former directors and officers were negligent or grossly negligent in making the loans because they were improperly underwritten, and that the officers and directors breached their fiduciary duties to the bank. The former officers and directors failed to adequately inform themselves of the relevant risks and acted recklessly in approving them. In addition, the FDIC alleges undue loan concentration, out-of-area lending, high loan-to-value ratios, and overall weak loan administration. Finally, the FDIC alleges that regulatory examiners "repeatedly warned" the bank of these risks and the bank chose to ignore these warnings.

I really do see a sea change when it comes to boards, corporate governance and risk management.  When a financial institution's risk management program fails or is non-existent, directors won't be able to point their fingers at management and say, "That was their responsibility." When it comes to risk management and boards, it is becoming increasing clear that there is no "they" or "their."  

***

I wanted to key you all in to a NAFCU promotion.  Here's an ad you may have seen recently. 

We're urging non-members who are eligible to join NAFCU to consider trying us on for size with a free, no obligation 6 month trial.   If you enjoy the blog, I think you'd enjoy membership with NAFCU.  Take a look at what we offer and consider kicking the tires.  As I always like to say, free is good.  

 

My In-Box Runneth Over

Posted by Anthony Demangone

While I know how many of you prefer that the title of the blog should reference the subject matter, that probably wouldn't work so well today.  I plan to hit a bunch of topics, so the title would have resembled the name of a certain village in Wales.

Interchange.  Representative Barney Frank (D-Mass.) now supports passing legislation (C.U Times) to delay implementation of debit interchange restrictions. 

1099.  Remember that pesky provision in the health care reform bill that tweaked the 1099-MISC?  Well, the Senate passed HR 4, which would repeal the controversial change.   The legislation now goes to President Obama for his signature.

CFPB.  NAFCU was pleased to take part in a hearing yesterday on how the CFPB will affect credit unions.  Lynette Smith, CEO of Washington Gas Light FCU, testified at the hearing on our behalf. 

“We believe that if a CFPB is to exist, its primary focus should be on regulating the unregulated in the financial services arena, and not adding new regulatory burdens to those entities that already fall under a functional regulator,” according to Smith’s written testimony prepared for today’s hearing. The authority to regulate all credit unions, she states, should be returned to NCUA.

Stay lifted.  The short-lived stay on the Regulation Z mortgage loan originator compensation rule has been lifted.  (National Mortgage Professional.com)  It was a long-shot at best. The rule is now effective. Carry on...

Mortgage servicing.  This post from the Bank Lawyer's Blog notes now some of the nation's largest servicers are entering into consent agreements with their primary regulators.  The agreements reportedly demand better internal controls over the servicing areas, including the foreclosure process and communications with borrowers who are in default.  One thing caught my eye - the agreements reportedly demand board involvement in the servicing oversight area.  This is just another example of how regulators are placing a greater focus on boards and corporate governance.  We'll see if these orders find their way into regulation or guidance documents.  If I were a betting man, I expect to see some sort of servicing rule or guidance document in the next two years that applies to credit unions.  But I'm not a betting man.  In Vegas, I once placed a $20 wager that the Nationals would win the World Series.  

Speaking of servicing.  Is the CFPB interested in these servicing agreements/negotiations/discussions?  Yes. Very much so.   (ABA Dodd-Frank Tracker)This is one of the reasons I expect some formal rule or guidance document that addresses servicing. 

Interchange lawsuit. The lawsuit that attempted to invalidate the Fed's debit interchange rulemaking process?  It failed.   But much like my $20 wager on the Nationals, I didn't expect all that much success.

FFIEC.  NCUA is now chairing the FFIEC.  This is a great reminder of an important fact: When you see an FFIEC guidance document, such as an IT Booklet for the BSA Manual, remember that NCUA is part of the FFIEC.  Treat that guidance document as if it were created by NCUA itself.

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Thoughts on School; Force-Placed Insurance; Policies and Board Involvement; HSAs

Posted by Anthony Demangone

I'm back in the saddle at NAFCU after a fantastic week at our compliance school.  If you want to see what 180 enthused credit union compliance officers look like, well, it looks like this:

I think one attendee summed the week up well in a brief exchange with me on Friday.  He thanked me and NAFCU for the event.  I said I was glad that he enjoyed it.

"Oh, I didn't enjoy it. It was a great event and I learned a ton.  But I wouldn't call it enjoyable!" 

And I know exactly what he meant.  It was a wonderful week, but a very tough week.  

***

Now, back to the grind.  

Force-placed insurance.  Here's a fantastic post (Bank Lawyer's Blog) that discusses the AG proposed settlement regarding mortgage servicers and how it would affect force-placed insurance. In short, the settlement agreement would prohibit mortgage loan servicers from earning profit from force-placed insurance policies.  Under the proposal, mortgage servicers would be prohibited from force-placing insurance with an affiliate, and from accepting "kick-backs," referral fees or accepting anything of value related to the force-placement of insurance.  If you want the bloody details, just start reading on page 24.   My takeaway? Any income you receive from force-placed insurance related to mortgage servicing is now clearly subject to increased regulatory risk.  If the proposed AG agreement finds its way into the requirements of the secondary market, or on to the "to-do" list at the CFPB, the agreement may very well affect your bottom line. Stay tuned.

Board fiduciary duties and policies and procedures. Here's a thought that came up a few times at NAFCU's Compliance School.  I see a potential red flag in the following situation. NCUA has indicated that boards should be involved in the formation of many important credit union policies.  The board sets the credit union's appetite for risk, its limitations for concentration, etc.  When a policy is supposed to reflect a board position, how can that policy be written without their involvement at some level?  And how could a credit union adopt a policy created by a third party without having board involvement to tailor it to their credit union's operations? Credit union should consider how this might affect their board members, especially in relation to their duty of care. 

HSAs. Treasury has redesigned and reorganized its web page dedicated to Health Savings Accounts. 

Monday Morning Hodgepodge

Posted by Anthony Demangone

Happy Monday, everyone!  I hope you enjoyed your weekend half as much as I did.  Here are a few items to get yourself rolling.  

Regulatory Compliance School.  We're gearing up for a record crowd at this month's NAFCU Regulatory Compliance School.  NAFCU's attorneys have been busy drafting a new manual for the event.  Here's a sneak peek at the manual's table of contents.  As you can see, we've been pretty busy for the past year or so.  We'll have the manual available for sale later this spring if anyone is interested. 

1099.  We're getting closer to a legislative fix to the 1099-MISC fiasco that came out of last year's health care reform legislation. 

CFPB.  The new agency continues to meet with "smaller" institutions.  The CFPB wrote of a recent visit by community bankers. They recently met with NAFCU staff and a small number of NAFCU member credit union CEOs as well.  The agency is hearing a lot from us, but it will be important to continue a dialogue regarding concerns we have with regulatory burden.  And an open door is much better than the alternative.

Fiduciary duties. NCUA responded to a request from NAFCU to clarify that a federal credit union's board of directors can continue to delegate its ultimate authority over senior management to the chief executive officer of the federal credit union.

In response to Hunt’s specific questions, (Bob) Fenner said this doesn’t change existing NCUA policy. The full board may delegate to its executive committee the authority to hire, fire, determine duties of, set compensation for and discipline senior management, he said. It can also, within limits, delegate to the chief executive officer the authority to hire, fire and compensate subordinate employees, including other management personnel. 

Fenner noted that “if a board determines to delegate to the CEO the authority to hire, fire, fix the compensation of, or discipline other senior managers,” appropriate standards and controls should be put in place.

Mortgages. Reuters reports state attorney generals have sent proposals to America's largest mortgage lenders that recommends principal reductions before resorting to foreclosure. This doesn't appear to directly affect credit unions, but attorney generals can effectively regulate on a national basis if they strike the right agreements with the right parties.  (Think HVCC.)  Stay tuned.

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Board Governance and "Direct Dialing"

Posted by Anthony Demangone

Through the years, I have learned that some read regulations and guidance documents through a lens that serves their interests. For instance, they focus on the one paragraph of a document that seemingly supports their position, while ignoring many provisions that do not.  I've come to believe that one of best qualities a compliance officer can have is the intestinal fortitude to look an executive or board member in the eyes, and say the following with certainty and professionalism:

I'm sorry, but I don't believe the regulation says that.

I had one of those moments recently with a compliance officer from a federal credit union.  It seems that one director from the credit union was calling staff members directly to check in on certain loan applications, certain projects, and the like. The director said that the new NCUA regulation concerning fiduciary duties said that the director could do that, and in fact, encouraged directors to bypass the CEO to deal with staff whenever they wanted. 

Let's say it together.  I'm sorry, but I don't believe the regulation says that.

The director perhaps read a news article that casually talked about the regulation.  Or perhaps the director did skim the new rule.  In any event, the regulation doesn't exactly support the director's argument.

Here's the section of the regulation that the director pointed to:

(2) Federal credit union staff providing services to the board of directors or any committee of the board under paragraph (c)(1) of this section may be required by the board of directors or such committee to report directly to the board or such committee, as appropriate.

I'll just make a few points on this text.  There's no mention of "director" in that paragraph.  Rather, this paragraph talks of the board's right to require staff to report to the board, or a committee of the board, as appropriate.  A director, by himself or herself, has little to no power. It is only as part of a board that the director can vote on matters, assuming a quorum is present.  So, a board, or a committee of a board, would have that right - but, again, this paragraph does not talk about a director's individual right. 

Did NCUA discuss this issue elsewhere? Yes, they did.  When NCUA issues a final rule, they also publish a "discussion" section that goes into detail regarding what they were thinking when they crafted certain provisions of a regulation. Here's what they said about the paragraph that we're discussing today.

Some commenters opposed the provision requiring FCU employees (staff) to report directly to the board of directors or committees of the board, stating this would undermine management’s authority over the employees of the credit union. Another commenter questioned whether committees other than the supervisory committee had the authority to require employees to report directly to the committee. One commenter argued that direct contact between the board of directors and the credit union’s employees would put employees at the beck and call of the board and could interfere with the employees’ regular duties.

The NCUA Board disagrees. An FCU’s board of directors cannot permit the chief executive officer (CEO) to screen all the board’s information sources.  While the board of directors should not attempt to bypass the CEO in giving direction to management and employees, the board is free to ask any manager, employee, or independent contractor to provide the board and its committees information directly and not through the filter of the CEO. The NCUA’s Office of General Counsel has previously opined that board members must be free to gather information from any source in the credit union to perform their board duties. OGC Op. No.03–0763 (Sept. 29, 2003).  (Emphasis added.)

To summarize, a federal credit union's board does have the right to gain direct access to information from credit union employees.  And they have that right, as appropriate, as needed to perform their duties. But NCUA went on to clarify that boards should not bypass the CEO to direct or manage the credit union's employees.  That's the CEO's job. 

Now, I believe that is what the regulation states!  (As always, though, I'm happy to hear comments and feedback, especially on board governance issues.)

***

Here are some tasty compliance tid-bits.

• The repeal of a new and controversial 1099-MISC reporting requirement is nearly here.
• Episode 57 of "Current Issues in Credit Unions" is fresh out of the oven.

This and That...Revisited

Posted by Sarah Loats

MDIA. The Federal Reserve's Tuesday press release seems to have caused some confusion - due to docket numbers. As Anthony noted yesterday, the press release indicated the Federal Reserve was not going to finalize three current proposed rulemakings prior to the transfer of rulemaking authority to the CFPB. The docket numbers for these rulemakings were included in this press release and one of the docket numbers (Docket number R-1366) happens to also be the docket number for the MDIA interim final rule. So this question arose yesterday - does this mean that the MDIA rule is killed? No, no it doesn’t. They didn't withdraw the interim final rule - it's still on the books.


Healthcare. We just wanted to clarify yesterday's blog post about the 1099. The Senate did not actually vote to repeal the 1099 provision from the healthcare bill. Rather, they voted to add language to an existing bill, that if enacted would repeal the 1099 provision. That bill currently remains in the Senate. Yesterday's post has been fixed.


CFPB. The Cop on the Beat has launched its website. Since the CFPB is taking over rulemaking authority for most of the consumer protections regs, you’ll want to be familiar with this site.

This and That...

Posted by Anthony Demangone

Here are a few items of interest.

The Fed.  You may have heard that the Federal Reserve has announced that it doesn't expect to complete three Regulation Z rulemaking initiatives before the CFPB assumes rulemaking authority for Regulation Z.  The rulemakings would have addressed mortgage disclosures (including HELOCs), the right of rescission, credit protection products (such as disability insurance), and reverse mortgages and modifications. You can read more about their decision via the link above.  Is the news good or bad?  Yes.  On one hand, this calms things down on the Reg Z front - at least for a little bit.  The CFPB takes hold of Reg Z in July, so these rules aren't going to be finalized before then.  But on the other hand, these issues can be picked up by the CFPB.  So the story isn't over.  How the CFPB will choose to proceed is a major unknown.  Stay tuned. 

Healthcare.  You may recall that we wrote about a certain provision of heath care reform that affected 1099s - greatly expanding their reach and increasing burdens for American businesses.  President Obama alluded to this provision in his State of the Union address, noting it was one provision that could change.  Yesterday, the U.S. Senate overwhelmingly voted to add language to an existing bill that, if enacted, would repeal that 1099 provision.  (Washingtonpost.com).  In other health care reform news, you may have seen that a judge struck down  (Washington Post) the entire health care reform law.  What does that mean? Ezra Klein provides a nice analysis.  (Washington Post.)

HMDA.  Bankersonline.com does a nice job of gathering civil money penalty information.  A number of FDIC-regulated entities have been hit with civil money penalties for HMDA violations.  A large number.   This underscores the importance of understanding HMDA, which is why I love the FFIEC's HMDA compliance guide. 

Regulation Z.  The FFIEC has announced (via the Fed) that the interagency Regulation Z examination guidelines have been updated.   This, folks, is a useful compliance resource. 

This and That...

Posted by Anthony Demangone

Here are some items of interest...

• NCUA has released its agenda for this Thursday's NCUA Board meeting.  The agenda isn't Earth-shattering in terms of compliance.
• Treasury has named Holly Petraeus to head the Office of Servicemember Affairs at the CFPB. I expect that the creation of this office will shine a bit more light on military compliance issues, such as the SCRA.  Regarding Ms. Petraeus, you'd be hard-pressed to find anyone who understands more about military life.  This comes from the Treasury announcement.

Petraeus knows firsthand from her own personal experience as well the strains facing America’s troops and their families. She is the daughter of Army Gen. William A. Knowlton, a previous superintendent of West Point. Her son, brother, grandfather, and great-grandfather all served in our armed forces. Petraeus, a military spouse for more than 35 years, is also the wife of Army Gen. David Petraeus, current Commander of the International Security Assistance Force in Afghanistan and former Commander of the U.S. Central Command.

• FinCEN pushed a lot of paper recently.  First, they released their semi-annual SAR Activity Review - By the Numbers.   This document gives you a TON of statistical data on SAR filings.  If you do BSA training, these statistics can be used to create fancy, colorful charts.  People seem to like those.  FinCEN also released an updated Mortgage Loan Fraud Update.   It looks like SAR filings related to mortgage fraud continue to increase.
• The IRS is looking to increase reporting requirements.  They issued this proposal which would require financial institutions to report interest/dividend payments to nonresident aliens of any foreign country. 
• The NMLS (the SAFE Act Registry) has announced a number of  internet-based workshops to introduce institutions to the registry.  The workshops are not designed for individual mortgage loan originators.  It looks like the workshops cost $50.
• It has begun.  Congressman Michelle Bachman (R-Minn.) introduced her first bill for this Congress.  The bill would repeal the Dodd-Frank financial reform legislation. 

NCUA LOL on compensation and the IRS; A little privacy help from the FDIC

Posted by Anthony Demangone

Yesterday, NCUA released Legal Opinion Letter 10-0919 (September 22, 2010)  via its Express Subscription Service.   The opinion letter addresses NCUA's compensation regulation.

In short, NCUA regulations contain a general prohibition against compensating directors and other volunteer officials, not including the one paid director position as allowed by the Federal Credit Union Act. General rules often contain exceptions, as does this one.  For example, under NCUA's compensation rule, you can pay for a director's health insurance (subject to the rule's limitations), and this insurance benefit does not violate NCUA's general ban on compensation.  The same goes for training expenses.  

The exceptions, though, only pertain to NCUA's rule.  As NCUA indicates in its legal opinion:

The use of the term “compensation” in §701.33 is only for the purpose of describing the kind and amount of payment or reimbursement an FCU is permitted to provide to a board officer. NCUA’s use of that term does not in any way affect an FCU’s obligation to issue a Form 1099 to an individual when the IRC requires it.

So, there really is a two-step process.  First, when conferring a benefit or reimbursing expenses for a volunteer, the payment or benefit first must be able to pass through NCUA's compensation regulation.  If the payment can pass through the rule's requirements, a credit union must then determine if it must issue an appropriate 1099, in the name of the director. 

***

The FDIC issued FIL-60-2010 to help supervised banks comply with the new model privacy notice requirements.  The guidance does a nice job of framing the issue.  While the guidance applies to banks, I believe credit unions will find it to be a useful overview.

IRA Periodic Statements; Shameless Plug

Posted by Anthony Demangone

Because it is Friday, and because I love all of you, I thought I would try to save you some money.  Here's a regulatory wrinkle that might save your credit union a few dollars.

IRA periodic statements.  If your credit union offers IRA accounts, you may be shocked to learn this little fact. You are under no legal obligation to deliver IRA periodic statements.  IRAs are exempt from Regulation E, as the regulation considers them to be "trusts." Trusts, are not subject to Regulation E, per the regulation's definition of "account."  In addition, Truth in Savings does not mandate that you send a periodic statement.  It only creates certain requirements if you do.  For the "Doubting Thomas" in you, here's the regulatory language from Regulation E.

(b)(1) Account means a demand deposit (checking), savings, or other consumer asset account (other than an occasional or incidental credit balance in a credit plan) held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes.

(2) The term includes a “payroll card account” which is an account that is directly or indirectly established through an employer and to which electronic fund transfers of the consumer's wages, salary, or other employee compensation (such as commissions), are made on a recurring basis, whether the account is operated or managed by the employer, a third-party payroll processor, a depository institution or any other person. For rules governing payroll card accounts, see §205.18.

(3) The term does not include an account held by a financial institution under a bona fide trust agreement.

And from the Staff Commentary of Regulation E:

Custodial agreements. An account held under a custodial agreement that qualifies as a trust under the Internal Revenue Code, such as an individual retirement account, is considered to be held under a trust agreement for purposes of Regulation E.

If you add the two together, you'll find that IRAs are not subject to Regulation E.  Therefore, they are not subject to Regulation E's periodic statement requirements. Even if the IRA gets an electronic deposit. Now, let's look at NCUA's Truth in Savings regulation. 

• The staff commentary to NCUA's Truth in Savings regulation point blank states that the regulation does not require that you send a periodic statement.  It simply states that if you do so, you must follow its requirements.
  
• Note that the definition of "periodic statement" also excludes "share certificates."  Therefore, even TIS's requirements do not apply to share certificates. So, if you have an IRA account that only holds a share certificate, you are completely off the radar. NCUA only requires if you voluntarily disclose information, that the information be accurate and not misleading. 

So, let's summarize.

•  IRAs (and HSAs for that matter) are not "accounts" for the purposes of Reg E.  For that reason, they are not subject to Reg E's periodic statement requirements - even if the member deposits funds electronically into the account on a regular basis.
• Truth in savings does not mandate that you send periodic statements. Its requirements only kick in if you decide to send one.  And its requirements do not apply to share certificate accounts.    

So, how can this save you money?  Let's see.

1. Technically, you could simply do away with periodic statements for IRAs.  You would still have to send the IRS-mandated disclosures, so members would still get some information.  This choice, however, may not be feasible from a "member expectation" point of view. 
2. If you are going to send periodic statements, there's certainly no regulatory need to send them on a monthly basis.  Quarterly certainly is OK.  And I don't see a regulatory hurdle to an annual periodic statement.  You just have to meet NCUA's Truth in Savings requirements if the IRA account holds a  non share-certificate, account. 

***

Shameless plug. Next Wednesday, I'll take part in a 2-hour long webcast that will cover the August 22 Reg Z changes and the changes found within the 2010 BSA/AML Examination Manual.  I've reviewed the slides so far, I'm convinced that the content will be worth your time.  I'll take roughly 20 slides and 30-40 minutes to hit the BSA portion, and then Steve and Sarah will address the remainder.  We've allotted an extra 30 minutes to answer any extra questions and answers, as we'll hit on so many topics. And yes, I do note the irony.  I tried to save you money above.  And now I'm asking for it.  Such is life.

Have a great weekend, everyone!

IRS Backup Withholding; BSA Civil Money Penalty; Fiduciary Duties; Seminar Snapshot

Posted by Anthony Demangone

Happy Friday, everyone!  Here's some info to help start the weekend.

Backup Witholding.  The IRS has issued Announcement 2010-41  regarding new procedures for backup withholding.  The announcement applies only when a credit union receives a second notice from the IRS that a member has provided an incorrect taxpayer identification number (TIN) or name.  Under IRS rules, when the second notice is received the credit union must obtain validation of the TIN from the Social Security Administration (SSA) or the IRS, but to do that, the member must authorize the SSA to send the now discontinued Form SSA-7028 to the credit union.  The announcement outlines how the credit union needs to notify the member on providing the credit union with validation of the SSN.

BSA Civil Money Penalty.  Yesterday, FinCEN announced a $1 million civil money penalty against Pamrapo Savings.

Pamrapo’s lack of internal controls combined with unqualified BSA compliance personnel, relatively non-existent training and deficient independent testing resulted in a wholly ineffective BSA compliance program which, in turn, resulted in the failure to file a substantial number of currency transaction and suspicious activity reports in an accurate and timely manner. Pamrapo Savings Bank, without admitting or denying the allegations, consented to payment of the civil money penalty.

So, yes, BSA is still an issue for regulators.  Did I mention that NAFCU will host a BSA-related webcast on July 14th?  (Shameless, shameless plug, I know.)

Fiduciary Duties.   NAFCU recently sent this comment letter to NCUA on the fiduciary duties proposal.  I like reading comment letters, because they can highlight issues that you may have missed when reading a proposal.   If you look at NCUA's proposal rules homepage, they have links where you can read the comments.

Speaking of fiduciary duties, many folks have been asking if NAFCU's online training program satisfies the proposal's requirements on board training.  Since I created the training program, I tend to get those questions. Here's my take:

1. First, the proposal is just a proposal. We won't know what the final rule requires until it is issued.
2. Assuming that the final rule will mirror the proposal (which is a huge assumption), there appears to be two major areas where directors may need training.  First, the proposal appears to require that, within 90 days of joining the board, directors need to have training on financial issues so that they can read a financial statement and raise appropriate questions.  Second, directors have to be able to ensure that the credit union runs its affairs within all applicable laws and regulations.  Both of these areas likely will need training.

Does our training meet these requirements?  That's a tough call, because I'm not the final judge.  We do have an ALM session that addresses some aspects of financial reports.  We do talk about how credit unions are regulated and examined.  And we address BSA.  But ultimately, you'll have to ensure that the training program you select meets your needs.  In other words, do your due diligence.  With that in mind, take a look of the outline of our training program for directors and officials.  And here is the training homepage, which includes a demo.

Flood.  The FDIC recently issued more than $16,000 in civil money penalties against two different banks for alleged flood insurance violations.  This really worries me, because banks get clobbered for flood insurance deficiencies all the time. Don't believe me?  Look at this page at BankersOnline to see the list of flood CMPs.  More than 25 banks have received civil money penalties this year. But for some reason, credit unions do not get these CMPs, even though the requirements are the same.  This keeps me up at night.  With that in mind, we'll have someone at this year's NAFCU Compliance Seminar to address flood insurance issues. Here's a description of the session.

Stemming the Tide of Flood Compliance Issues
This presentation will provide insight into credit unions’ compliance obligations under the federal flood regulations with a focus on changing requirements under recently revised regulatory guidance. You will learn about the regulators’ “Questions and Answers Regarding Flood Insurance”, challenges related to resolving flood determination discrepancies, and NFIP reform and how it impacts credit unions and their members.  Opportunities for asking questions will be provided to allow you to bring your compliance issues to the table. Presented by Scott Giberson, CFM, Compliance Manager, CoreLogic Flood Services.

OK, that's enough for today.  Enjoy your weekend, everyone!

Odds and Ends

Posted by Anthony Demangone

Welcome back, everyone.   I hope everyone is getting over their sunburns and overloaded email inboxes.   Now, on to the post...

Red Flags Delayed...Again.  The FTC has delayed enforcement of its Identity Theft Red Flags rule...again. Enforcement is now delayed until December 31, 2010.

At the request of several Members of Congress, the Federal Trade Commission is further delaying enforcement of the “Red Flags” Rule through December 31, 2010, while Congress considers legislation that would affect the scope of entities covered by the Rule. Today’s announcement and the release of an Enforcement Policy Statement do not affect other federal agencies’ enforcement of the original November 1, 2008 deadline for institutions subject to their oversight to be in compliance.

The delay only benefits state chartered credit unions.  Federally-chartered credit unions have been under NCUA's identity theft regulation for quite some time.

Reg Z's Closed End Final Rule. A little birdie told us that the Fed is nowhere close to releasing the final rule that will amend its closed end lending rules. 

Fraud and insider abuse. OTS has released an updated version of Regulatory Bulletin 37-54.  The bulletin addresses the issue of fraud and insider abuse.  The bulletin discusses virtually every angle of this issue, from filing SARs to risk mitigation techniques.  I'd share this with your security officer.  While the citations flow to OTS requirements, the basic information is sound and worthy of your attention.

1099s.  NAFCU is in no way an expert on tax issues, but we do track IRS-related issues to see how they could affect our members.  You may not have seen this yet, but buried inside the health care reform legislation was language that will change how 1099s are prepared.  The changes will take effect in 2012.  Here's a general article that highlights how those changes may affect American businesses - including credit unions. (CNNMoney.com)

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.

The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.

Taken together, the two seemingly small changes will require millions of additional forms to be sent out.

Shameless plug.  Tomorrow, I'll moderate a NAFCU webcast on Hot Issues at NCUA.  There's still time to sign up! 

IRS Form 990 and FCUs

Posted by Anthony Demangone

There has been a bit of confusion over whether federal credit unions must file an IRS Form 990.  To clear things up, they do not.  But don't take my word.  Back in 1988, NCUA issued Letter to Credit Unions 100 to explain why credit unions are exempt from the requirement. 

The Internal Revenue Service has now informed us that, according to their regulations, organizations that are tax exempt under Section 501(c)(1) of the IRC do not have to file an informational return or make such return available for inspection. (See Section 1.6033-2(g) (vi) of the Income Tax regulations, 26 C.F.R. 1.6033-2(g)(1)(vi).) Since FCU’s are tax exempt under Section 501 (c) (1) of the IRC, FCU’s are not required to file or maintain an informational tax return. Accordingly, NCUA will no longer file a consolidated Form 990.

File this one away, as it is a nice way to show why we don' t need to file the IRS 990 when that question pops up. 

Have a great weekend everyone.  I'm currently in San Antonio at NAFCU's Volunteer's Conference.  Mandy will join me later today.  I see a stroll down River Walk in our future. (As well as Missions' game.)

Cross-Border Transaction Guidance; 1099s and SSNs

Posted by Anthony Demangone

Recently, NCUA issued guidance, along with other regulators, on cross-border transactions.  Here's a link to a NAFCU Today article, which also links to the guidance.  I'd focus on page 4 of the guidance, which outlines what examiners should focus on.

***

Do you have to include a SSN on 1099s?  Yes and no.  According to this IRS notice (IRS Notice 2009-93), the IRS created a pilot program for calendar years 2009 and 2010 to try out the idea of truncating taxpayer identification numbers.  But only on the paper payee statement for the 1099, 1098 and 5498 series for now.  Read the notice in its entirety, as there are some qualifications to the general pilot program.

This notice creates a pilot program allowing filers of information returns to truncate an individual payee’s nine-digit identifying number on paper payee statements for calendar years 2009 and 2010 if the filers meet the requirements set forth in this notice. This notice only applies to paper payee statements in the Form 1098 series, Form 1099 series, and Form 5498 series. Filers who meet the requirements in this notice will be treated as having satisfied any requirement in Treasury and IRS guidance, whether in a regulation, form, or form instructions, to include a payee’s identifying number on a payee statement.

A Little of This, A Little of That

Posted by Anthony Demangone

Here are a few things that have been rattling around my in-box recently.

• A criminal BSA prosecution against a bank. You don't see this very often.  Someone asks me every so often what has to happen for the government to use this power under the Bank Secrecy Act.  This is a good example. This could be a good item to share in a training session to underscore that criminal prosecution is a real possibility.  However, it is usually used against an organization or official who uses their position to inentially evade the Bank Secrecy Act's requirements.  Here's a taste of what the bank allegedly did:

It was further part of the conspiracy that (the bank) opened multiple accounts held in the names of nominees or other business entities so that the cash deposits, on any one day in excess of $10,000, could be deposited into the various accounts, in order to conceal the relationship between the transactions and the depositors and to avoid the filing of any reports. Emphasis added.

• The IRS is starting a pilot program to allow those who file IRS information returns to truncate the individual's 9-digit identifying number on paper payee statements.    It looks like the pilot program is limited to 1098s, 1099s and 5498s.

• NCUA issues Regulatory Alert 09-RA-14 to highlight recent changes to Reg CC and how those changes might affect your funds availability policy.

• NCUA issues Regulatory Alert 09-RA-13 to highlight changes to the annual fee threshold for HOEPA loans under 12 C.F.R. Part 226.32.  The dollar threshold will drop from $583 to $579, effective January 1, 2010.

Stabilization Fund; BOA Updated

Representative Paul Kanjorski, a well-known champion of credit unions (and a fellow Keystone Stater, to boot!) has introduced legislation designed to help credit unions spread out payments to recapitalize the NCUSIF over a number of years.   The legislation does a number of other things as well.  I'd say this is a must read.  Access his press release here.  NAFCU Today has a good article on the development here.

Spreading out payments doesn't lessen the amount that a credit unions would ultimately pay.  But it would help credit unions that might facePCA problems due to a one-time "whopper" NCUSIF recapitalization payment. 

Yes.  I said Whopper. 

***

Hey NAFCUers: We've updated our Book of Answers.  Download it here.

For you non-NAFCUers, here's a taste:

Question: We are redesigning our account application. We see some credit unions that require two signatures – one for the credit union application, and a separate signature for the substitute W-9. Other credit unions require one signature. Which is correct?

Answer: Either method is permissible. As you stated, the IRS allows credit unions to incorporate a substitute W-9 within their membership application. AW-9 is an IRS form used to request the taxpayer identification number of a U.S. person, including a resident alien. The form also asks for certain certifications and claims for exemptions. Credit unions that incorporate a substitute W-9 into their application must clearly state certain things. The IRS has indicated that substitute W-9s that require a separate signature line for the certifications satisfy the requirement that the required disclosures be “clearly stated.” If your credit union decides to use a single signature line for the required certifications and other provisions, “the certifications must be highlighted, boxed, printed in bold-face type, or presented in some other manner that causes the language to stand out from all other information contained on the substitute form.” In addition, the IRS requires the following statement to appear immediately above the single signature line: “The Internal Revenue Service does not require your consent to any provision of this document other than the certifications required to avoid backup withholding.” See Instructions for the Request of Form W-9 (Rev. September 2007), available at www.irs.gov.
May 2009

IRA RMD Guidance; New Flood Form Unveiled

The IRS has released IRS Notice 2009-09 to help financial institutions report required minimum distributions (RMDs) for 2009.  As you may recall, President Bush recently signed the Worker, Retiree, and Employee Recovery Act of 2008, which waives RMDs for 2009.  The notice gives guidance on how to complete IRS Form 5498 and gives other tips.

Issuers of the 2008 Form 5498, IRA Contribution Information, should not put a check in Box 11. However, in recognition of the short amount of time to make programming changes, if a financial institution issues a 2008 Form 5498 with a check in Box 11, the IRS will not consider such form issued incorrectly solely because of the check in Box 11, provided the IRA owner is notified by the financial institution no later than March 31, 2009, that no RMD is required for 2009.

In addition, the RMD information required under Notice 2002-27, 2002-18 I.R.B. 814, need not be sent to IRA  owners for 2009. If a financial institution sends a separate RMD statement to an IRA owner, either initially or in response to the owner’s request for the financial institution to calculate the RMD for 2009, the financial institution must show the RMD for 2009 as zero (0). Alternatively, the financial institution may send the IRA owner a statement showing the RMD that would have been required but for the waiver of RMDs for 2009, along with an explanation of the waiver for 2009.

The IRS encourages all financial institutions to inform IRA owners who delayed taking their 2008 RMD until April 1, 2009, that they are still required to take that distribution.

Access Notice 2009-09 here.

***

FEMA recently unveiled its new Standard Flood Hazard Determination Form.   (Unveil, perhaps is too strong a word.   This certainly isn't the new I-Phone.)  Access the FEMA press release here, which also contains a link to the new form.  To allow users of the Form time to update their systems to the new version, the effective date for mandatory use of the new Form will be June 16, 2009.

Frequently Asked Questions; delicious

Anthony has mentioned the value of Frequently-Asked-Questions documents in past blog postings here and here.  These documents can help compliance officers weave through convoluted regulations and find answers to common issues.  Here are a few that I've found useful in the past: 

Bank Secrecy Act

Anti-Money Laundering Compliance FAQs

FinCEN Answers to FAQs on BSA

FAQs on Final CIP Rule - February 2004

FAQs on Final CIP Rule - May 2005

FAQs Relating to BSA and Hurricane Katrina

OFAC

OFAC Q&As Prepared by Treasury

Privacy

FAQs on the Privacy Regulation

Share Insurance

FAQs from NCUA's October 7, 2008 Webinar on Share Insurance Changes

NCUA's FAQs on NCUSIF and Share Insurance

HMDA

FAQs on Regulation C (HMDA Reporting)

RESPA

FAQs on RESPA for Industry

Appraisals

FAQs on Appraisal Regulation and Interagency Statement*

*Note:  The Agencies recently announced a proposal to replace this interagency statement.

Third Party Due Diligence

FAQs from NCUA's January 29, 2008 Webinar on Third-Party Relationships

Flood Insurance

2008 Proposal on Interagency Q&As on Flood Insurance (would replace 1997 Q&As)

1997 Interagency Q&As on Flood Insurance

Servicemembers Civil Relief Act (SCRA)

HUD's Q&As for Lenders Regarding SCRA

Judge's Guide to SCRA - including Q&As

Health Savings Accounts

Q&As on Health Savings Accounts - IRS Notice 2004-50

Q&As on Health Savings Accounts - IRS Notice 2008-59

Check 21 Act

Consumers FAQs on Check 21

FAQs for Financial Institutions on Check 21

Check 21 FAQs on Financial Institutions Requirements - from ABA

Accounting for Loan and Lease Losses (ALLL)

Questions and Answers on Accounting for Loan and Lease Losses

Online Banking

FFIEC Guidance on Authentication in an Internet Banking Environment

Savings Bonds

FAQs on Savings Bonds

***

You never know when these FAQ's will come in handy.  That is why I have mine bookmarked on my delicious page.

If you are wondering what delicious is, take a look at the user guide and slides I prepared for a talk on Organizing the Compliance Information Flow at NAFCU's 2008 Regulatory Seminar.

If you know of other valuable FAQ documents, please let us know by adding a comment to this post. 

HSA....Q and A!

You know how much I love "question and answer" guidance.  (Here's an earlier post that lists some of my favorite FAQ's.)  Yesterday, Treasury released this "question and answer" guidance document that addresses Health Savings Accounts.  Many of the issues addressed seem to be directed toward consumers that use HSAs, but a few touch upon credit union issues.  For example...

Q-28.May an HSA account beneficiary authorize someone else to withdraw
funds from his or her HSA?

A-28. Yes. Although an HSA is an individual account, an HSA account
beneficiary can designate other individuals to withdraw funds pursuant to the
procedures of the trustee or custodian of the HSA. Distributions are subject to tax if
they are not used to pay for qualified medical expenses for the HSA account
beneficiary, the account beneficiary’s spouse, or dependents.

FBI Warns of IRS Stimulus Scam

The FBI issued an e-scam alert (back in May - hopefully this isn't too late!) that warns of a scam involving IRS stimulus payments.  You can access the e-scam alert here.  Here is part of the alert:

The FBI warns consumers of recently reported spam e-mail purportedly from the Internal Revenue Service (IRS) which is actually an attempt to steal consumer information. The e-mail advises the recipient that direct deposit is the fastest and easiest way to receive their economic stimulus tax rebate. The message contains a hyperlink to a fraudulent form which requests the recipient's personally identifiable information, including bank account information. To convince consumers to reply, the e-mail warns that a failure to complete the form in a timely manner will delay the issuance of the rebate check.

Why should compliance officers care about this?  NCUA's security guidelines require credit unions to take appropriate steps to safeguard sensitive member information.  In recent guidance, NCUA suggests that education campaigns alerting members to phishing scams and other threats are a good idea.  Here's a timely threat to your members that you may want to incorporate into some sort of member education.  Or you should be aware of it, at the very least.

FinCEN has a New Look; You Win Some, You Lose Some; Where's My Check?

FinCEN has updated its web page.  I normally get queasy when agencies update their web pages, because I have to spend the next two weeks wandering around the "new and improved" website to find what I need.  But this change makes sense.  You can visit it here.  FinCEN now organizes information by industry.  Along the top, you'll see an icon for "financial institutions."  When you click on that, you'll go to an area that gathers all the information that pertains to us.  Nice.

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NAFCU (4-6) split another double-header.  Somehow, we have to win two in a row to get back to .500.  I'd like to say that we're a much better team than our record reflects.  But doesn't every team with a losing record say that?  That being said, we are a much better team than our record reflects.  Really.

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Here's a link to an old post that tells you when you can expect your IRS stimulus check. Or, as my friend Larry puts it, when he can expect to buy a big screen TV.  Based on the IRS schedule, many of the checks are about to delivered or are on their way very soon.  For credit unions, this could lead to increased deposits or loan payments. 

Can a Credit Union Borrow Money to Purchase Investments?; HSA Index Amounts

According to NCUA, the answer is yes, subject to the general rules and limits that apply to borrowing and investing.  Go here to read  NCUA Legal Opinion Letter 08-0139 (April 18, 2008) for all the details.

Under the FCU Act, FCUs have the express power to borrow from any source, limited to 50% of paid-in and unimpaired capital and surplus. 12 U.S.C. §1757(9). The National Credit Union Administration’s (NCUA’s) regulation on maximum borrowing authority implements this provision at 12 C.F.R. §741.2. The statute and the regulation do not restrict how an FCU can use borrowed funds.

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The IRS has issued new Health Savings Account index amounts for 2009.  Read all about it here.

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We have more entries for the flower garden flower contest.  Check out the photos here. (Don't forget to send in your entry!)

Have a great weekend, everyone!

IRS Economic Stimulus Payments

While this is not a classic compliance issue, I understand that people often task compliance officers with difficult queries.  In other words, if they don't know the answer, they ask you.

In that vein, here's some intel regarding IRS Economic Stimulus payments.  The IRS indicated that that it will deliver economic stimulus payments to taxpayers via direct deposit if the taxpayer selected direct deposit to receive their tax refund.  If the taxpayer received their tax refund via paper check, then they'll get the economic stimulus payment via check. 

The IRS also indicates when the deposits will hit accounts.  It states that:

Taxpayers who choose direct deposit on their federal income tax returns can expect to receive their economic stimulus payments between May 2 and May 16 provided their returns were received and processed by April 15, 2008. For taxpayers who did not choose direct deposit on their tax return but whose returns were processed by April 15, the paper checks will be in the mail starting May 16, with the initial mailings completed by around July 11.

I'd give your front-line staff a head's up.  I'm sure they'll get a bunch of questions that will come in two flavors.

Flavor 1.  Did my economic stimulus payment hit yet?
Flavor 2.  I see a $600 deposit in my savings account.  (Pause.)  Can I keep it?

Important thought: not everyone will get a stimulus package payment.  The IRS provides this calculator to taxpayers, which allows the taxpayer to see if they are getting one.   

You can access the IRS announcement regarding economic stimulus payments here.  It provides some good information - such as the exact date taxpayers can expect a payment (assuming they get one), based on the last two digits of their social security number.  I've cut and pasted the chart below.  (I cringe as I write this, because I really don't know how the chart will look when this post is "posted" to the blog.  There's a good chance that you'll see gobble-gook below.  If not, disregard this sentence of paranoia.) 

Stimulus Payment Schedule for Tax Returns
Received and Processed by April 15

Direct Deposit Payments
If the last two digits of your Social Security number are:	Your economic stimulus payment deposit should be sent to your bank account by:
00 – 20	May 2
21 – 75	May 9
76 – 99	May 16
Paper Check
If the last two digits of your Social Security number are:	Your check should be in the mail by:
00 – 09	May 16
10 – 18	May 23
19 – 25	May 30
26 – 38	June 6
39 – 51	June 13
52 – 63	June 20
64 – 75	June 27
76 – 87	July 4
88 – 99	July 11

Here's a thought: this might be good information to share with your members.  You could place it on your homebanking log-in page, or on your website.  It could cut down on some calls and emails.

Free HMDA Software Available; 1099-INT Thresholds

The FFIEC has announced the availability of free HMDA data entry software, which was created by the Federal Reserve.  You can access a press release about it here.  The software is to be used with 2008 HMDA data, which will be due March 1, 2009.

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We've had calls from a number of credit unions who appear to be working on 1099-INTs.  Here is some guidance for the following situation:

Last year, member A earned $6.78 in dividends and $11.58 in interest in U.S. Savings Bonds.  Clearly, you would need to report the $11.58 in box 3 on the 1099-INT.  But what about the $6.78 in dividends?  Do you report that in box 1, since you have to file a 1099-INT anyway?

Well, a dutiful compliance officer made a call to the IRS Martinsburg Computer Center.  (They are the IRS' resident expert on 1099s and W2s.)  They indicated that you are not required to report the $6.78 in box 1 in the hypothetical situation above.  (You may, however, at your discretion.)  According to the IRS, you must report amounts in boxes 1, 3 or 8 if the amount in question is $10 or greater.

Oh, I almost forgot.  The phone number for the IRS Martinsburg Computer Center is (866)455-7438.  They've been very helpful to me in the past.