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House hearing hints of interchange rule delay

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WASHINGTON (2/18/11)—Several legislators called for a delay of implementation of the Federal Reserve’s interchange fee proposal during a Thursday House financial institutions and consumer credit subcommittee hearing. Also prompting legislator concern about the impact on small issuers were comments from a Fed governor and earlier remarks by the Fed’s chairman, as well as testimony from the Credit Union National Association’s (CUNA) witness.
Click to view larger image Allied CU of Stockton, Calif., President/CEO Frank Michael urges lawmakers to stop, study and start over with the interchange rulemaking process. Several lawmakers also promoted delaying interchange regulation implementation during the House hearing. (CUNA Photo)
Fed Governor Sarah Bloom Raskin in testimony delivered early in the day said that the Fed would delay its rulemaking process if directed to do so by Congress. Raskin also noted that portions of the Dodd-Frank Act that instruct the Fed to ensure that interchange fees are “reasonable and proportional” to the costs of maintaining a debit card system were difficult for the Fed to interpret. The hearing also featured the testimony of Allied CU of Stockton, Calif., President/CEO Frank Michael. Michael, appearing on behalf of both his credit union and CUNA, reiterated CUNA’s urging for Congress to stop the implementation of the interchange standards and study the potential impact that the changes would have on credit unions and consumers. Congress could then restart the process of writing these potential regulations, Michael said. The Fed's interchange provisions could cap debit card interchange fees that are paid by merchants to card issuers at as little as seven cents per transaction. Issuers with under $10 billion in assets would be exempt from the interchange changes. Lawmakers questioned whether the Fed had been given the time needed to fully consider the impact that these interchange changes could have on financial institutions, merchants, and consumers, and Michael in his testimony noted a recent CUNA survey that found that 91% of CUNA’s member credit unions would be forced to change their current practices if the interchange proposal became law. These changes could mean increasing members’ existing debit card fees or introducing new fees and lowering deposit rates, he said. Michael added that the interchange regulations could harm low-income consumers by restricting their access to free checking accounts. He told committee members that his credit union would lose money on every debit card transaction made by one of its members if the Fed’s interchange proposal stands. “The only real question is how much” his credit union would lose, he added. Michael also questioned whether the Fed proposal would be able to enforce its proposed exemption for credit unions and other small issuers with under $10 billion in assets. Raskin during questioning said that the Fed’s plan to shield small issuers could be “eroded by market forces.” Fed Chairman Ben Bernanke also admitted this possibility in separate Senate testimony delivered on Thursday. (See related story: Senate Banking scrutiny of interchange questions exemption) CUNA President/CEO Bill Cheney said that CUNA was encouraged by the tenor of the hearing, and added that the combined comments of key legislators, regulators and our witness Frank Michael will increase pressure on Congress and the Fed to put on the brakes and rethink their approach. “That certainly will be the message we’ll be reinforcing when 4,000 of our folks are in town for the Governmental Affairs Conference later this month,” he added. The Fed proposal will remain open for public comment until Feb. 22, and, if approved, could come into effect in July.

Senate Banking scrutiny of interchange questions exemption

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WASHINGTON (2/18/11)--Federal Reserve Chairman Ben Bernanke on Thursday said that a planned interchange fee regulation exemption for credit unions and small institutions with under $10 billion in assets may not be effective in the marketplace, and admitted that there may be no way to ensure that small issuers are exempt from new interchange fee rules. The Fed chairman spoke during a Senate Banking Committee hearing on the progress of Dodd-Frank Wall Street Reform Act implementation. Bernanke in his testimony added that merchants could reject more expensive cards that would be offered by credit unions and other small financial institutions, and that debit card issuers may be forced to pass on the costs of debit card systems to their members and customers. Bernanke could not ensure that merchants would pass on their interchange fee savings to their consumers. The Credit Union National Association aired similar concerns in recent meetings with Fed representatives and legislators. Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair, who also testified during the hearing, shared many of Bernanke’s views, and speculated that the interchange changes could harm small financial institutions far more than they would help merchants. Bair added that credit union members and community bank customers could replace their current cards with less secure prepaid cards if smaller issuers are forced out of the debit card business. Bair also called for the Fed’s interchange rulemaking process to be delayed. (See related story: House hearing hints of interchange rule delay) Acting Comptroller of the Currency John Walsh said his group is also examining the Federal Reserve’s interchange provisions. Committee Chairman Sen. Tim Johnson (D-S.D.) and Sen. Jon Tester (D-Mont.) also raised concerns on interchange’s impact on credit unions and other small institutions, and Sen. Michael Bennet (D-Colo.) cited practical concerns with the proposed $10 billion interchange exemption. Other committee members offered their own takes on the interchange proposal and financial regulation in general during the hearing:
* Sen. Bob Corker (R-Tenn.) said he did not see how small institutions could not be impacted by the interchange changes, and questioned the fairness of price controls; * Sen. Mike Johanns (R-Neb.) called the Fed’s interchange proposal “draconian."
Sen. Jerry Moran (R-Kan.) said that many financial institutions in his district have complained that they are overburdened by financial regulations, and ranking committee member Sen. Richard Shelby (R-Ala.) said that overall, the amount of work required to implement the Dodd-Frank rules is “staggering.” For video of the Senate hearing, use the resource link.

NCUA takes control of small Pa. CU

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ALEXANDRIA, Va. (2/18/11)-- The National Credit Union Administration (NCUA) assumed control of operations at Greensburg Community FCU, Greensburg, Pa., on Thursday and assured service to its 983 members continues uninterrupted. In its release announcing the action, the NCUA noted that the decision to conserve a credit union enables the institution to continue normal operations with expert management in place correcting previous service and operational weaknesses. The Federal Credit Union Act authorizes the NCUA board to appoint itself conservator when necessary to conserve the assets of a federally insured credit union, protect members’ interests or protect the federal share insurance fund. Greensburg Community members can continue to conduct normal financial transactions--including depositing and accessing funds, make loan payments and use share drafts. Greensburg Community has assets of $2.2 million, and provides financial services to persons who live, work, worship, or go to school in, and business and other legal entities within a radius of three miles of the U.S. Post Office in Greensburg. This is the first federal credit union conservatorship of 2011. There have been two liquidation so far this year.

Inside Washington (02/17/2011)

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* WASHINGTON (2/18/11)--The Federal Reserve’s Consumer Advisory Council will hold its next meeting on March 10. The meeting will take place in Dining Room E, Terrace Level, in the Fed Board’s Martin Building. The session will begin at 9 a.m. ET and is open to the public. For security purposes, anyone planning to attend the meeting should register no later than March 8, by completing the form found online. Time permitting, the council will discuss foreclosure issues, neighborhood stabilization and real-estate owned issues, and proposed rules regarding debit card interchange fees and routing. The Board's notice can be viewed online … * WASHINGTON (2/18/11)--Small businesses facing maturity of commercial mortgages or balloon payments before Dec. 31, 2012, may be able to refinance their mortgage debt with a 504 loan from the U.S. Small Business Administration (SBA) under a new, temporary program announced Thursday. The new refinancing loan is structured like SBA’s traditional 504, with borrowers committing at least 10% equity and working with third-party lending institutions and SBA-approved certified development companies in the standard 50% /40% split. A key feature of the new program is that it does not require an expansion of the business in order to qualify. SBA will begin accepting refinancing applications on Feb. 28. The program, authorized under the Small Business Jobs Act, will be in effect through Sept. 27, 2012. The SBA initially will open the program to businesses with immediate need due to impending balloon payments before Dec. 31, 2012. SBA will revisit the program later and may open it to businesses with balloon payments due after that date or those that can demonstrate strong need in other ways … * WASHINGTON (2/18/11)--A House Financial Services Committee hearing Wednesday on the inconclusive Financial Crisis Inquiry Commission (FCIC) report, like the report itself, was fractured along party lines. Republicans on the House committee criticized the panel for not reaching consensus on its findings (American Banker Feb. 17). But the chairman of the FCIC, Phil Angelides (D-Calif.) defended the report. Only the six Democrats on the 10-member panel supported the findings, which cast blame among regulators, corporate executives and consumers for the crisis. The majority report concluded that human error was to blame. It faulted to some degree virtually every actor, including financial institutions, regulators and investors; products that encouraged unsustainable homeownership levels; the credit bubble; and circumstances like excessive leveraging and risk concentration. But the commission published three reports: one written by the Democratic commissioners, a second written by three Republican commissioners, and a third by the fourth Republican commissioner. Republicans questioned why the commission issued three reports, asking if GOP perspectives had been left out of the process … * WASHINGTON (2/18/11)--Federal banking agencies will level formal enforcement actions against several large servicing companies after finding deficiencies during a regulatory review of mortgage servicer practices, (American Banker Feb. 17). Of the 14 mortgage servicers reviewed by regulators after foreclosure problems surfaced in the media last year, most if not all are expected to be charged. Bank regulators are investigating bank servicers in the wake of revelations about foreclosure-documentation errors at big banks and a stalled application process for many troubled borrowers seeking to modify their mortgages. Though the orders would effectively establish de facto standards for the largest servicers, they are not expected to replace efforts by agencies to issue a formal set of servicing rules. Regulators are still divided on how to set such standards …

Credit rating equivalents proposed under Dodd-Frank

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ALEXANDRIA, Va. (2/18/11)--The National Credit Union Administration (NCUA) adopted a proposal Thursday that would replace or remove references to credit ratings in NCUA’s regulations as specified by a provision in the Dodd-Frank Wall Street Reform Act. The proposal would affect credit rating references for investments, counterparty transactions, as well as other uses of such references. Essentially, the agency proposal would replace references to credit ratings such as “AA” with equivalent terms like “very strong capacity to meet its financial commitments.” The proposal would also revise the NCUA’s liquidation rules (12 C.F.R. part 709) to state that the agency will use its statutory power to repudiate contracts with respect to transactions involving investments transferred by a failed credit union. Use the resource link below to see the NCUA proposal.

First updates in 30 years OKd for Corp. CU charter policy

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ALEXANDRIA, Va. (2/18/11)--For the first time in 30 years, the National Credit Union Administration approved updates to its chartering rules for corporate credit unions. At its open board meeting Thursday, the NCUA adopted a final Interpretive Ruling and Policy Statement (IRPS) that not only describes the requirements for charter applicants, it also includes the NCUA’s standards for reviewing the feasibility of a new corporate charter. Under the regulator’s interpretation, effective 30 days after publication in the Federal Register, a corporate charter application will need to be submitted by a group of at least seven people that represent different natural person credit unions. The application must satisfy the NCUA that the new institution would be viable. That assessment would be based on assessment of the proposed field of membership and other factors. It must also be determined that the new corporate would provide needed services to its members. The NCUA Office of Corporate Credit Unions (OCCU) will conduct an independent investigation of the corporate credit union’s charter application to assess economic and long-term viability. While the final IRPS largely reflects the proposed guidance issued by the NCUA in September, there were a few changes made based on comments submitted by the Credit Union National Association and others. The changes included:
* Clarification on the timeframe for a newly chartered corporate credit union to meet certain capital requirements; * Assurance from the agency in the rule’s supplementary information that the mandatory Letter of Understanding and Agreement required for a new corporate charter will take into consideration the future success of the corporate; and * Adding the right of charter applicants to petition the NCUA directly for a vote on an application where either: the OCCU director determined the application does not merit approval, or the applicants believe the OCCU has moved too slowly on the application.
Use the resource links below to view the NCUA IRPS and CUNA’s complete comment on the proposed statement.

FCU loan-rate cap continues at 18

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ALEXANDRIA, Va. (2/18/11)--Acknowledging that its action takes place at “an interesting time for credit unions,” the National Credit Union Administration (NCUA) voted to continue the federal credit union (FCU) loan interest-rate ceiling at 18%. Without the regulators’ action Thursday, the rate cap would have reverted to 15% as of March 11. The Credit Union National Association encouraged the agency to maintain the higher ceiling. Fifteen percent is the default ceiling set for FCUs by the 1980 Depository Institutions Deregulation and Monetary Control Act. If the NCUA approves a higher cap, as is allowed by that law, the agency is required to re-visit the rate ceiling within 18 months. An NCUA document recommending the continuation noted that trends in money market rates, which are starting to increase again, in part justifies the higher ceiling. Moreover, it added, a significant number of FCUs “depend on loans with interest rates that would be affected by any reduction in the ceiling.” “Indeed, as of (the third quarter of 2010), 122 FCUs had volumes of 15-18% loans exceeding 10% of assets,” the NCUA noted.

NCUA proposes enhanced incentive-compensation rules

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ALEXANDRIA, Va. (2/18/11)--The National Credit Union Administration (NCUA) Thursday issued for a 45-day comment period a plan that would require enhanced disclosure and reporting requirements for compensation arrangements, as well as prohibit incentive-based payment plans that can serve to encourage “inappropriate risk taking.”
Click to view larger image At the NCUA meeting Thursday, board members consider new rules for incentive-based compensation as required by the Dodd-Frank Wall Street Reform Act. In the foreground from left to right are board member Michael Fryzel, Chairman Debbie Matz, and board member Gigi Hyland. (CUNA Photo)
The NCUA proposal seeks to implement a provision of the Dodd-Frank Wall Street Reform Act, which requires all the federal financial institutions regulators to adopt a rule to weed out incentive-based compensation practices that could expose an institution to great losses. Dodd-Frank defines incentive-based compensation to mean any variable compensation, in any form, that serves as an incentive for performance. Under the NCUA proposal, all credit unions with more than $1 billion in assets would have to disclose executive incentive plans annually. There are further requirements for credit unions with greater than $10 billion in assets, termed “larger covered financial institutions” by the NCUA. Larger-covered financial institutions must meet certain provisions on deferral of incentive-based compensation for executive officers. For instance, they must require a 50% deferral of all cash bonuses for at least three years. At the end of that period, the credit union must adjust the bonus to reflect any losses suffered by the institution. Credit union above $10 billion-in-assets also must identify additional personnel, other than executive officers, “who have the ability to expose the institution to possible losses that are substantial.” During the NCUA comment period, credit unions could conceivably focus on the lack of equal treatment the NCUA rule poses for credit unions compared to banks. While the NCUA proposes to apply the deferral rules to $10-billion institutions, a Federal Deposit Insurance Corp. rule for banks, unveiled earlier this month, proposes to apply the stricter rules to institutions of $50 billion in assets or greater. Credit Union National Association General Counsel Eric Richard said of the discrepancy, “This is an area that the NCUA needs to consider further. Credit unions are not known to have engaged in the kind of sketchy incentive-compensation practices that the Dodd-Frank law seeks to address. “Does it make sense then to hold credit unions, which represent greater adherence to safe and sound practice, to more stringent standards than the perpetrators of the problem?” The NCUA, in its proposal document, maintained that the rule’s burden would be minimized by granting “covered financial institutions” flexibility to use “a variety of means to mitigate the risks posed by their current incentive-based compensation programs.” For more on the proposed rule, use the resource link below.