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NCUA unveils loan participation guidance

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WASHINGTON (12/30/08)—The National Credit Union Administration (NCUA) has released the guidance and questionnaire the agency’s field staff uses to assist in evaluation of loan participation programs. The overall theme of the agency's release is that credit unions must apply the same principles to loan participations that they apply to evaluating, selecting and monitoring third-party relationships. The NCUA has previously expressed concern regarding loan participation arrangements and it has been expected that the federal regulator would issue more direction to help credit unions avoid pitfalls. The agency reported that outstanding loan participations more than doubled between 2003 and 2008, increasing 262% in that period compared to a 149% increase in total loans. What’s more, the NCUA said annualized total dollars of loan participations charged off in 2008 were twice 2006 levels, resulting in the charge-off ratio increasing from 0.41% in 2006 to 0.64% in 2008. The charge-off ratio for total loans increased from 0.46% in 2006 to 0.75% in 2008. Loan participation delinquency was 1.10% in 2006 and 2.27% in 2008. Total loan delinquency was 0.68% in 2006 and 1.13% in 2008. The NCUA maintains that loan participation programs have their place. In his Letter to Federal Credit Unions, with guidance attached, NCUA Chairman Michael Fryzel said that properly managed loan participation programs can be beneficial to both selling and buying credit unions. A credit union selling loan participations may gain a mechanism to manage interest rate, liquidity, and credit risks as well as an enhanced ability to serve members. The purchasing credit unions may benefit from balance sheet diversification and increased revenue. However, the chairman reminded that there are potential risks and advised that a credit union should perform a comprehensive risk assessment before beginning loan participation activities. Due diligence, he said, is a key factor in assuring risks are identified and mitigated. The attached guidance and questionnaire regarding evaluating loan participation programs sets our 11 pages of direction and resources to assist credit unions in setting up successful programs. It describes practices examiners will find in a well-run loan participation program involving any type of loans, including automobiles, residential mortgages, and member business loans. The NCUA, for instance, recommends that a credit union deciding to engage in or develop a loan participation program start out small, gain experience, and build from that foundation. “A loan participation is a third-party relationship between a seller and a buyer, and as with any third-party relationship, the benefits of loan participations are accompanied by a variety of potential risks. Management should complete a risk assessment and perform due diligence prior to entering the third-party arrangement,” the guidance said. This guidance describes practices examiners will find in a well-run loan participation program involving any type of loans, including automobiles, residential mortgages, and member business loans.

Inside Washington (12/29/2008)

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* WASHINGTON (12/30/08)--Rep. Barney Frank (D-Mass.), House Financial Services Committee chair, is working to get the last half of the $700 billion rescue package released before President-elect Barack Obama takes office. Frank said he hopes the $350 billion will stimulate the economy. He also is working on legislation that would require the funds to be spent on stopping foreclosures. Frank’s bill would limit executive compensation and require banks to report on their lending each quarter (The Associated Press Dec. 23).

Annual report BSA reporting over 18 million

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WASHINGTON (12/30/08)—The 2008 annual report of the Financial Crimes Enforcement Network (FinCEN) shows Bank Secrecy Act (BSA) reporting through October was up from the previous year with slightly more than 18 million reports filed. That is up from 17.9 million in FY 2007. The number of Suspicious Activity Reports, Reports of Foreign Bank and Financial Accounts, Registrations of Money Services Business, and Reports of Cash Payments Over $10,000 Received in a Trade or Business all rose from the numbers filed during the previous fiscal year, according to FinCEN. The number of Currency Transaction Reports and Designations of Exempt Persons filed declined slightly. The reports are filed by a range of financial industry sectors, including credit unions and other depository institutions, securities broker-dealers, mutual funds, futures commission merchants, money services businesses and more. The FinCEN report also highlights its accomplishments in areas such as simplifying CTR exemption requirements, gathering feedback from affected sectors on the impact of hew and revised regulations, among other initiatives. The annual report also reiterates the value of BSA reporting to the country’s law enforcement goals. To read more, use the resource link below to access the report.

TARP FHA focus of early House hearings

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WASHINGTON (12/30/08)—The House Financial Services Committee has scheduled a Jan. 7 hearing to review the U.S. Treasury Department’s use thus far of the $700 billion in Troubled Asset Relief Program funds. Frank has been highly critical of the way the Treasury has handled the Capital Purchase Program, a part of TARP. In December, he called a TARP hearing just on the heels of a Government Accountability Office report on Treasury's implementation of TARP. Referring to the GAO report, Frank said at the time, "The American people received two kinds of news about the TARP program – bad and worse news." He said the report confirms that Treasury has no way to measure whether taxpayer funds invested in banks are being used in accordance with the purpose of the law. He added, "The much worse news is Treasury's response that it does not even have the intention of doing so." Also in January, the committee has also announced a hearing on the ninth on the Federal Housing Administration’s oversight of home mortgage loan originators. Witnesses have not been announced for either hearing. The Congress reconvenes Jan. 6. President-elect Barack Obama will be sworn into office Jan. 20.

IRS consolidates resources for Form 990

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WASHINGTON (12/30/08)—The Internal Revenue Service (IRS) has put together several resources on the changes to Form 990 and instructions for 2009, including frequently asked questions (FAQs). This summer, the IRS released revised instructions that will be needed by tax-exempt organizations to fill out the tax agency's redesigned Form 990. The new IRS form, Return of Organization Exempt from Income Tax, is effective for the 2008 tax year, for returns filed in 2009. State-chartered credit unions are required to file Form 990 with the IRS annually, although a few states still permit group 990 filings. Federal credit unions are not required to file, since they are not subject to unrelated business income taxes. Among the online informational resources are a page with seven categories of FAQs just for exempt organizations and a “Tax-Exempt Organizations Tax Kit.” The Credit Union National Association in November added an archived version of its "New 990 Reporting Rules" webinar to its website. It is available through May 11. The webinar, among other topics, shared preparation tips, such as the fact that there will be transition relief available for smaller organizations using a phase-in requirement for filing the new form over a three year period. To access the help-tips straight from the IRS, as well as the CUNA webinar, use the resource link below.