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CFPB Narrows Focus of Arbitration Work

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WASHINGTON (12/13/13)--Credit cards and checking accounts have been early targets as the Consumer Financial Protection Bureau examines the use of arbitration clauses, and CFPB Director Richard Cordray on Thursday said the agency has "narrowed and specified many of the remaining areas" it will look in to as it continues to research the issue.

The Dodd-Frank Wall Street Reform Act requested that the CFPB study the use of arbitration agreements in consumer financial services contracts. As a first step, the agency requested suggestions on the scope, methods and data sources it should use in its study. The results of the study will be reported to the U.S. Congress.

Cordray made his remarks at a Dallas field hearing on the issue. A preliminary CFPB study released during the hearing found that few consumers file arbitration cases, as roughly 9 out of 10 clauses allow banks to prevent consumers from participating in class actions.

Cordray noted one of the most notable findings about arbitration clauses is the stark contrast in the types of institutions that use them. "On the whole, larger institutions are more likely to include an arbitration clause in consumer contracts than community banks or credit unions. That raises interesting questions about why smaller institutions and credit unions do not use arbitration clauses as frequently in these markets," Cordray said.

Arbitration clauses are very common across all prepaid card contracts--"regardless of whether they are offered by a larger or smaller player," he added. "In fact, smaller players are much more likely to use arbitration clauses in prepaid card contracts than they are in credit card or checking account contracts."

The Credit Union National Association has said it supports the CFPB's attempts to evaluate how the use of pre-dispute arbitration agreements impacts consumers, and agreed that the CFPB should analyze the types and frequency of claims that consumers bring in arbitration. However, CUNA added, the agency should also consider and minimize any potential burdens that may be imposed on credit unions as a result of the study.

CUNA-backed Senate Bill Introduced to Expand CU Access to FHLB System

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WASHINGTON (12/13/13)--Sens. Sherrod Brown (D-Ohio) and Rob Portman (R-Ohio) introduced bipartisan legislation Thursday intended to make it easier for privately insured credit unions to offer loans through the Federal Home Loan Bank (FHLB) system.
 
Currently, privately insured credit unions are unable to gain access to the FHLB system, which prevents them from receiving secured loans to make mortgage, small business, and other economic-development loans to their members.
 
Brown said that expanding the eligibility of the FHLB system to privately insured credit unions is long-overdue.  "By providing these financial intuitions with the ability to join the federal home loan bank system, we help these community institutions keep more local dollars invested in local communities."
 
The legislation is supported by the Credit Union National Association and the Ohio Credit Union League.
 
Brown and Portman said their legislation would provide more than 150 privately insured credit unions in nine states--including their own--access to additional forms of liquidity through membership in the FHLB system. The current prohibition on these institutions' participation stems from a 1989 statutory change that expanded FHLB membership only to commercial banks and federally insured credit unions.

The FHLB system is comprised nationally of 12 banks and more than 8,000 member institutions.

NCUA Approves Final Charitable Donation Account Rule

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ALEXANDRIA, Va. (12/13/13)--Credit unions will soon be permitted to invest in hybrid charitable and investment vehicles known as charitable donation accounts (CDAs) under a new regulation approved by the National Credit Union Administration on Thursday.

Specifically, the rule clarifies that federal credit unions are authorized to create and fund a CDA, a hybrid charitable and investment vehicle, as an activity incidental to the business for which the credit union is chartered, provided the account is primarily charitable in nature and meets other regulatory conditions to ensure safety and soundness.

"This innovative rule strikes the right balance to provide flexibility, but ensures that the majority of earnings received from the account will benefit charities and communities, rather than propping up a credit union's income statement," NCUA Chairman Debbie Matz said.

The rule includes a Credit Union National Association supported change that limits total investment in CDAs to 5% of the credit union's net worth for the duration of the account. The proposed version of this rule, released in September, set this limit at 3%.

A minimum of 51% of the total return from such an account would have to be distributed to one or more qualified charities. Distributions could be made to qualified charities no less frequently than every five years and when the account terminates.

CUNA Deputy General Counsel Mary Dunn noted that while the final rule made clear there is no requirement that a trust vehicle be used, if one is used the trustee must be regulated by the Office of the Comptroller of the Currency, the Securities and Exchange Commission, or other federal or state agency. "We will be talking more with NCUA about this," she said.

The final rule will become effective once it is published in the Federal Register.

For more on the NCUA meeting, use the resource link.

NCUA Takes Bagumbayan CU Under Conservatorship

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 ALEXANDRIA, Va. (12/13/13)--The National Credit Union Administration and Illinois Department of Financial and Professional Regulation have assumed control of service and operations at Bagumbayan CU, Chicago.

Great Lakes CU, North Chicago, and the NCUA will manage the credit union as the NCUA works to resolve issues affecting the institution's safety and soundness. Normal member services will continue uninterrupted, the NCUA said.

Bagumbayan CU is the fifth federally insured credit union placed into conservatorship this year.

The conservatorship follows an October cease and desist order. In that order, the agency requested that the credit union not allow unapproved officials to attend board meetings or perform managerial and operational functions, resolve recordkeeping issues and Bank Secrecy Act violations, and correct other issues.

The NCUA said it has not made decisions about the long-term future of the credit union. Continued credit union service for the members, however, is a priority, the agency said.

Bagumbayan CU was chartered in 1964, has assets of $55,140 and currently serves 44 members, according to the credit union's most recent Call Report.

Budget Deal Good for CU Legislation: CUNA

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WASHINGTON (12/13/13)--One of the best things about the advancement of a two-year bipartisan budget deal, said Credit Union National Association Executive Vice President of Government Affairs John Magill late Thursday, is "a Congress not distracted by shutdowns is more likely to advance legislation benefitting credit unions, such as CUNA-backed relief from patent trolls, privacy act modifications and IOLTA legislation." IOLTA refers to Interest on Lawyers Trust Accounts.

It was widely reported last night that the House passed a two-year budget deal by 332-94, which dramatically reduced the likelihood of another government shutdown in 2014.

Rep. Paul Ryan (R-Wis.) and Sen. Patty Murray (D-Wash.) crafted the agreement. It sets discretionary spending at more than $1 trillion for the next two fiscal years. It also attempts to offset the impact of broad spending cuts-called sequestration--that went into effect in March (The New York TimesDec. 12).

"A shutdown government," Magill said, "cannot move forward on important relief measures for credit unions." He added this caution, however: "At the same time, we have to remain ever watchful of any movement on the tax front that could threaten the credit union tax status."

TCCUSF Oversight Budget, Mortgage Appraisal Exemptions Approved by NCUA

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ALEXANDRIA, Va. (12/13/13)--The 2014 Temporary Corporate Credit Union Stabilization Fund Oversight Budget will be just over $4.5 million, the National Credit Union Administration said at Thursday's open board meeting.

Technical changes to an agency rule on the corporate credit union rating system were also approved during the meeting, and board members heard a briefing on an interagency supplemental rule on appraisals for higher-priced mortgage loans.

The $4,525,000 budget represents a decrease of 26% from the oversight budget approved for 2013.

Credit unions will not be billed for this budget, and NCUA Chairman Debbie Matz said the budget will not change the agency's projected assessment for 2014. There will be no change in staffing as a result of the budget.

The funds will be used to cover certain corporate system resolution costs, including external valuation experts, tax consultants, attorneys, financial specialists and accountants.

In other budget news, Credit Union National Association Deputy General Counsel Mary Dunn noted that the average annualized travel spent per full time employee was $21,473 in 2013. While this was not an enumerated agenda item, the agency provides this and other financial highlights pertaining to its operating fund at each board meeting, she noted.

The technical amendments, which were swiftly approved on Thursday, make amendments to NCUA's regulations to reflect a recent policy change: In September 2013, the NCUA board adopted a policy change that converted the rating system for corporate credit unions from Corporate Risk Information System (CRIS) to CAMEL. The agency will evaluate corporate credit unions under the CAMEL system starting on Jan. 1.

The supplemental final rule on appraisals for higher-priced mortgage loans finalizes, with revisions, certain exemptions proposed in July 2013. Specifically, the proposal exempts from higher-priced mortgage loan appraisal requirements transactions secured by existing manufactured homes and not land; certain streamlined refinancings; and transactions of $25,000 or less.

CUNA generally supported the proposal.

For the full interagency proposal and more on the NCUA board meeting, use the resource link.

CUNA Urges Hill Action on 'Main Street' Patent Reform

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WASHINGTON (12/13/13)--Noting that the fight for patent litigation reform and demand letter relief "is truly a Main Street issue," the Credit Union National Association urged Senate lawmakers to protect businesses of all sizes from the "smash and grab tactics" employed by patent trolls.

In a letter to the Senate Committee on Commerce, Science and Transportation, CUNA and its consigners applauded ongoing bipartisan efforts in the U.S.  Congress to curb abusive patent litigation. The letter was sent to the committee's chairman, Sen. John Rockefeller (D-W.Va.),  and its ranking member, Sen. John Thune (R-S.D.),  as well as to the chairman of that panel's subcommittee on consumer protection, product safety, and insurance, Sen.  Claire McCaskill (D-Mo.) and the subcommittee's ranking member Dean Heller (R-Nev.).

The Innovation Act of 2013 (H.R. 3309), which would remove some of the financial incentives sought by firms that assert low-quality patents in the hope of quick settlements, was approved by the U.S. House last week on a 325 to 91 vote. It has moved on to the Senate.

So-called "patent trolls" continue to use low-quality patents to try to extract settlements from credit unions and others. Credit unions have been sued for the use of certain ATM technologies, check imaging applications and check cashing applications, and providing members with mobile transactions through their smartphones.

CUNA and others in the letter noted that "vague and misleading pre-litigation demand letters are at the very center of the patent troll problem. Many, if not most claims begin and end with a demand letter as companies quickly pay undeserved "licensing fees," to simply make the patent troll go away."

Home-based CUs May Need a Second Address Under NCUA Plan

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ALEXANDRIA, Va. (12/13/13)--A proposal that would modify the operations of home-based federal credit unions was one of the most discussed items at Thursday's National Credit Union Administration open board meeting.

Click to view larger image National Credit Union Administration board members hear a staff presentation on proposed regulations for home-based credit unions during Thursday's open board meeting. (CUNA Photo)
The proposal would require small home-based federal credit unions to have a business office of the credit union outside of a residence or have another public location that is appropriate for contacts with the NCUA. Also, the credit union would have to have either a dedicated phone number or email address for contact with the NCUA and members.

The rule eventually would prohibit the FCUs from operating out of homes. All federal credit unions would have to maintain a business office not located in a home within two years of the final rule's effective date. Storage of credit union records at residential locations would also be prohibited.

According to NCUA, there are approximately 95 remaining home-based, federally insured credit unions, 14 of which are state chartered. The agency plans to provide grants and other assistance to help these institutions relocate.

The NCUA proposed the changes to address concerns about member privacy, public access and the safety and working conditions of NCUA's examination staff.

Operating credit unions out of private residences raises regulatory and supervisory concerns, including operational risks, privacy risks and potential conflicts of interest, the NCUA said.

NCUA Chairman Debbie Matz said "most credit union members, especially young members, want to conduct business from their homes online, not visit someone else's private home to conduct business." Further, she said, operating a credit union inside the manager's home, with no internal controls, creates "ample opportunity for fraud and violation of members' privacy."

Examiner safety can also be threatened when they enter home-based credit unions, agency staff noted during the meeting. They recounted incidents in which examiners were bitten by dogs, denied the use of a restroom, or forced to work in other odd conditions as they complete their examinations.

NCUA board member Michael Fryzel was the lone dissenting vote on this proposal, and he questioned whether the Federal Credit Union Act gave the agency the authority to tell credit unions they must have commercial space.

Fryzel said requiring credit unions to operate out of a commercial space would not necessarily deter thieves. If somebody's going to steal they are going to steal regardless of whether the credit union is home based or in a big luxury building, he said. He also emphasized that many home-based or church-based credit unions do not want to grow. "In my opinion this is going to put a lot of them out of business if they need to get commercial space," Fryzel said.

The proposed rule was released for a 30-day comment period.