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CAMEL 4-5 shares down significantly from peak

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ALEXANDRIA, Va. (12/17/10)—The level of shares represented by low-ranked CAMEL 4 and 5 credit unions has declined significantly since its peak in May when those institutions held 6.2% of total shares. The monthly National Credit Union Share Insurance Fund (NCUSIF) report for November showed that while, at 372, there are 21 more CAMEL 4 and 5 credit unions than in May, they represent 5.1% of total shares. The NCUSIF report, made public at the National Credit Union Administration open board meeting yesterday, also showed no share insurance losses the month. In addition, the NCUSIF maintained the equity ratio of 1.29% from the previous month. NCUA staff also noted that there are currently 1,792 CAMEL 3 credit unions, which represent 18.6% of insured shares. Combined, insured shares in CAMEL 3, 4, and 5 credit unions represent 23.7% of insured shares. The NCUA during the meeting also made some insurance-related changes, proposing that the agency temporarily provide full NCUSIF coverage for non-interest-bearing transaction accounts held by members or depositors. The insurance coverage will be separate from, and in addition to, other coverage provided by the NCUA’s existing share insurance rules, the agency said. The Dodd-Frank Act, which was enacted earlier this year, included a provision that provides temporary unlimited Federal Deposit Insurance Corporation (FDIC) and NCUSIF insurance coverage for non-interest and non-dividend bearing transaction accounts. This special insurance came into effect on July 21, and runs through December 31, 2012. The NCUA proposal would require credit unions that offer these non-interest/non-dividend transaction accounts to disclose the temporary insurance coverage to their members. However, these disclosures would not be required until later in 2011. The NCUA also moved to add Chief Economist John Worth to their NCUSIF Investment Committee. Worth joins Office of Examination and Insurance Director Melinda Love, Chief Financial Officer Mary Ann Woodson, and Office of Capital Markets Director Owen Cole on the committee.

Fed offers two plans for interchange fees

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WASHINGTON (12/17/10)--The Federal Reserve on Thursday issued for public comment its proposed rules addressing interchange fees. The proposal, which was required by the recently enacted Dodd-Frank financial regulatory reform package, will allow the Fed to set interchange fees. Card issuers with under $10 billion in assets would be exempt from the proposed rule changes. This exemption covers most, but not all, credit unions. Government administered debit cards would be exempt from interchange rules. The Fed has offered dueling frameworks for assessing the interchange fees. One framework would provide issuers with a safe harbor of 7 cents per transaction, and sets a maximum interchange fee cap of 12 cents per transaction. An alternative framework would simply cap the maximum interchange fee at 12 cents per transaction. These safe harbors and/or caps would be reevaluated by the Fed every two years. The Fed included costs related to switching and data processing, but did not include fraud prevention costs in its interchange rate determination. The Fed did examine fraud costs, however. The proposal also does not require payment networks to establish a two-tiered system. Card issuers would be permitted to use interchange fee revenues to recover costs related to transaction authorization, clearance, and settlement via interchange fees. However, income from the interchange fees would not be used to cover costs related to debit card production or distribution, general deposit accounts, overhead, and cardholder rewards programs. During the board meeting, Fed officials said that they could not predict how the new interchange rules, once implemented, would impact the finances of consumers or the competitive landscape for card issuers. Fed officials said it was "unlikely" that the Fed would release its final rule by the statutory implementation date of April 21. The proposal will remain out for public comment until Feb. 22. The Credit Union National Association (CUNA) has estimated that up to 67% of credit unions would lose money on their debit card programs if the interchange regulations reduced interchange-related revenues by 40%. CUNA President/CEO Bill Cheney on Thursday expressed strong concern about the interchange proposals potential cost to credit unions and their members. (See related story: More time, consideration needed on interchange rule: CUNA)

More time consideration needed on interchange CUNA

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WASHINGTON (12/17/10)—Addressing reporters yesterday in a national press teleconference, Credit Union National Association (CUNA) President/CEO Bill Cheney expressed strong concern about the potential cost to credit unions and their members of the Federal Reserve Board’s just-issued proposal to set debit interchange fees under the recently enacted Dodd-Frank financial reform law. Cheney took part in yesterday’s press call along with Jeff Tassey, executive director of the Electronic Payments Coalition, whose members include CUNA. The CUNA leader told reporters from national news publications, including The Wall Street Journal, USA Today and The Washington Post, that CUNA is very concerned about how the Fed plan could drive up transaction costs to consumers, a concern he said is noted by the Fed’s own document. Cheney said that CUNA acknowledges that the Fed was in a “difficult if not impossible position,” being charged under the law with setting interchange fees that would reflect “reasonable cost,” without being allowed to consider all issuers’ costs. Key costs the Fed did not consider in setting its rate are the costs related to fraud prevention and the actual cost of fraud, Cheney explained. The Fed’s documentation indicates that it did look at fraud prevention costs, but did not include those costs in the rate that it set. Instead, the Fed only included costs related to switching and data processing, he noted. “However, fraud prevention costs are critical to financial institutions such as credit unions,” Cheney added. “As the former chief executive of a credit union that operated a debit card program, I can attest that fraud prevention – combined with the costs of fraud itself – is the primary cost of providing debit card programs for credit union members. Somebody is going to have to pay those costs: Merchants don’t, and the proposed Fed rate (of between 7 to 12 cents per transaction) won’t. If anybody is going to shield consumers from higher fees, it is credit unions – but, at some point, adjustments are going to have to be made by credit unions to account for these costs,” he said. Card issuers with under $10 billion in assets are exempt from the proposed debit fee restrictions of 7 to 12 cents per transaction. This exemption covers most, but not all, credit unions, but Cheney said CUNA is concerned that small issuers may be placed at a significant competitive disadvantage under a two-tier system. He noted the Fed has acknowledged the proposal’s routing provisions may well undermine the exemptions, and added that the Fed’s proposal does not provide any enforcement provisions that would effectively prevent merchants from turning away debit cards from credit unions or other smaller issuers at the point of sale. Cheney urged credit unions to weigh in with the Fed while the proposal is out for comment and said CUNA would be doing the same. CUNA has also urged the Fed to slow down the regulatory process and has noted that the law was passed without public hearings. Expressing similar reservations, 13 senators this week signed a letter to the Fed to express their serious concerns about the harmful impact of this rule on consumers and the American economy.

NCUA addresses low-income members CUs

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ALEXANDRIA, Va. 12/17/10)--The National Credit Union Administration (NCUA) approved for a sixty-day comment period a proposal that would permit federal credit unions to use “statistically valid” random samples of member income data to prove their low-income status to the agency. Specifically, the NCUA would allow credit unions to randomly draw sample data on member incomes from loan files or surveys. Currently, sample data must be actual income data that is drawn from a minimum of 50% of a credit union’s membership, plus one additional credit union member. The NCUA currently determines a credit union’s low-income status via the results of its own geo-coding software which uses census data to determine the average income of a membership area. The use of sampling is an alternative way to obtain low-income designation; geo-coding will still be employed in some instances. The financial status of individual members was also addressed during the meeting, with the NCUA making final an earlier proposal that would amend the definition of “low-income members” to clarify that for purposes of determining a LICU designation, the comparison of credit union data, whether individual or family income data, must be with statistical data for the same category. The status of an individual credit union was also addressed during the meeting, with the NCUA deciding to uphold a regional determination that Tri-State FCU would not be permitted to expand its field of membership to include members of a local YMCA. The Board determined that the requirements for common bond association had not been met by the Penn.-based credit union. For more on the NCUA meeting, use the resource link.

New rule spans fiduciary duties CU conversions

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ALEXANDRIA, Va. (12/17/10)—To help federal credit union directors better carry out their fiduciary duties, the National Credit Union Administration is, for the first time, adopting a formal requirement that those directors not only carry out their duties in good faith, but also have or gain an understanding of “basic finance and accounting practices.” The rule, adopted by the agency at its Thursday open board meeting, also strips federal credit unions of the ability to indemnify officials or employees for liability associated with misconduct that is “grossly negligent, reckless, or willful” in connection with a decision that affects the fundamental rights of the credit union’s members. This rule on indemnification only applies to decisions affecting members’ “fundamental rights”--such as in a merger or conversion--and also only applies if a court has determined that the official or employee acted in a grossly negligent or reckless manner, or willfully engaged in misconduct. A separate proposed rule on indemnification that applies in more situations has not yet been finalized by the agency. Procedural and substantive requirements for converting a credit union to a bank through a merger are also addressed by the rule change. The revisions are designed to better protect the secrecy and integrity of the voting process and include such things as a new definition of the term “secret ballot.” The new definition is intended to prohibit credit union employees from helping members complete ballots or handling completed ballots. The new requirements, effective 30 days after publication in the Federal Register, applies to direct mergers as well as transactions where a credit union first converts to a mutual savings bank (MSB) and then merges with another bank without ever operating as a stand-alone MSB. Finally, the proposed amendments to Parts 708a and 708b revise existing rules to enhance the secrecy and integrity of the voting process in MSB and insurance conversions and require additional disclosures to members about the costs and effects of charter conversion. Use the resource link below to see the 74-page final rule document.

Inside Washington (12/16/2010)

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* WASHINGTON (12/17/10)--The U.S. Department of the Treasury Wednesday announced the hiring of senior leadership for the Consumer Financial Protection Bureau (CFPB) implementation team. Current Ohio Attorney General Richard Cordray was selected to lead the agency’s enforcement division. Leonard Chanin will lead the rule-writing team and David Silberman will head the card markets division. Chanin most recently served as deputy director of the Federal Reserve Board’s Division of Consumer and Community Affairs. Silberman last served as general counsel and executive vice president of Kessler Financial Services. Federal credit unions under $10 billion in assets must comply with CFPB regulations, but exam and enforcement authorization for those rules remains with the National Credit Union Administration (NCUA). Credit unions with more than $10 billion in assets fall under CFPB purview, but their safety and soundness oversight remains with NCUA … * WASHINGTON (12/17/10)--Sen. Sheldon Whitehouse (D-R.I) said Wednesday that he will seek legislation to mandate that bankruptcy courts foster better communication between servicers and homeowners (American Banker 12/16/10). As the impetus for his proposal, Whitehouse, who is chairman of Senate Judiciary subcommittee, cited a bankruptcy loss-mitigation court program in his state that forces servicers to provide borrowers an opportunity to speak with their mortgage companies. Whitehouse said his proposal would not give judges the authority to reduce mortgage debt, but would require communication, which he said can be enough to prevent foreclosure … * WASHINGTON (12/17/10)--Treasury Secretary Timothy Geithner said Wednesday that although the housing market remains weak, the government continues to help as many eligible home owners as possible. Geithner’s comments before a congressional oversight committee came one day after a Treasury report indicated that the Home Affordable Modification Program (HAMP) fell well short of its stated goals. HAMP will prevent 700,000 to 800,000 foreclosures, after initial projections that it would prevent 3 million to four million foreclosures. Despite falling short of forecasts, Geithner said HAMP was a part of a strategy that left the financial system able to support, rather than impede, economic growth. “The economy as a whole has made substantial progress since the recession ended last year,” Geithner said. “Real GDP (gross domestic product) has risen for five straight quarters, and private sector firms have started to hire again. The housing market remains weak, but there are signs that it is beginning to stabilize.” Geithner said the Treasury is working to create a new housing credit and applying downward pressure to mortgage rates through agreements with Fannie Mae and Freddie Mac … * VIENNA, Va. (12/17/10)--The Financial Crimes Enforcement Network (FinCEN) assessed a $12,000 civil money penalty against Baltic Financial Services, Inc. of Montclair, N.J., for non-compliance with Bank Secrecy Act (BSA) registration requirements. FinCEN charges that the money transmitter that provides unlimited money transmission services to and from Latvia failed to maintain its registration with FinCEN as an MSB. FinCEN says money services business (MSB) registration--which must be renewed every two years--is a critical part of the government’s efforts against money laundering, terrorist financing, and other financial crimes. FinCEN’s claim says Baltic Financial, for most of the period between January 2005 and September 2010, failed to maintain its registration despite “actual knowledge” of the registration obligation. Furthermore, FinCEN states, Baltic failed to respond in a timely manner when “repeatedly reminded” that its registration with FinCEN lapsed, and continued to engage in money transmission without the benefit of registering under the BSA. There is no fee associated with MSB registration …