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Washington

CUNA: IRS UBIT memo clears way for past-tax refunds for CUs

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WASHINGTON (4/10/14)--Credit unions have received a much-sought-after interpretation by the Internal Revenue Service that clears nearly all credit union products from being subject to unrelated business income tax (UBIT).
 
Finally bowing to the results of two federal court cases brought by credit unions, the IRS recently issued a memorandum that defines nearly all credit union products at stake in the litigation as "substantially related income"--not subject to UBIT.
 
Credit Union National Association President/CEO Bill Cheney hailed the "highly significant development," particularly as it signals that refund requests for past tax payments by credit unions may now be processed. "And--most importantly," Cheney said, "credit unions now may be able to offer products and services to their members in the future with a significantly diminished threat of having to pay this tax."
 
Larry Blanchard, chairman of a coalition of credit union groups that has supported the litigation, said of the IRS memo, "This is clearly a breakthrough with the agency. It signals that credit union tax refunds for past UBIT payments should now be processed."
 
He also emphasized that the IRS action bolsters credit union arguments that future payments to the IRS of UBIT on these same products may not be due.
 
"Credit unions should talk this over with their tax advisers. In any event, this is a welcome development for credit unions," Blanchard observed.
 
He added that the IRS memo reflects the agency's appreciation for rulings of the courts: That the credit union mission to serve members extends well beyond loans and savings accounts.
 
The coalition, called the UBIT Steering Committee, is comprised of representatives of the Credit Union National Association, CUNA Mutual Group, the American Association of Credit Union Leagues and the National Association of State Credit Union Supervisors.
 
According to a three-page, March 24 "memorandum for all exempt organizations employees"--geared toward IRS examiners of exempt organizations, such as credit unions--revenue from the following income-producing activities are deemed by IRS "substantially related income" not subject to UBIT:
  • Sale of checks/fees from a check-printing company;
  • Debit card program's interchange fees;
  • Credit card program's interchange fees;
  • Interest from credit card loans;
  • Sale of collateral protection insurance;
  • Credit life and credit disability insurance (not subject to UBIT if sold to members); and
  • Guaranteed asset protection (GAP) auto insurance (not subject to UBIT if sold to members).
Royalty income from the marketing of accidental death and dismemberment (AD&D) insurance to credit union members is also exempt.
 
IRS has also indicated it will incorporate the memo into its Examination Manual to guide future audits of credit unions.
 
"After 15 years of work--and millions of dollars in litigation expenses--it is ironic that a breakthrough in the struggle of this scope comes down to a three-page memo," Blanchard said. "But the effort has been entirely worth the time and money, particularly for those credit unions who have filed their returns and made payments in the past."
 
In 2009, a jury in federal court ruled in favor of Community First CU, Appleton, Wis., as UBIT related to three insurance products; credit life and credit disability insurance and GAP products. The jury found that these products were substantially related to the tax-exempt purposes of credit unions.
 
In 2010, a federal court in Colorado ruled in favor of Bellco CU. The Greenwood Village, Colo.-based credit union challenged UBIT on income from many of the same products through its direct lending program and its indirect lending program for the tax year 2003 and the portion of tax year 2001 for which it had accurate income records.
 
As to the impact of the IRS guidance on future tax liabilities, neither the UBIT Steering Committee nor any of its members can provide tax advice to credit unions. The committee urges credit unions to consult with their tax advisers on whether the IRS pronouncement, combined with the previous court rulings, provide "substantial authority" to refrain from reporting the affected categories of income in the future. In the past, a law firm retained by the Steering Committee has provided a general opinion on the impact of the court cases on the "substantial authority" issue.  (Use the second resource link to access this opinion.)
 
There are, Blanchard pointed out, some remaining issues to be resolved related to the March 24 IRS memo.
 
"However," he noted, "this development gives us great hope that real light is at the end of the tunnel, and that credit unions will be able to offer products and services to their members in the future with a significantly diminished threat of having to pay this tax."
 
Use the first resource link to access the IRS memo.

CFPB hits BofA with $727M in fines, repayments

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WASHINGTON (4/10/14)--Bank of America, N.A. and FIA Card Services, N.A. have been ordered to repay an estimated $727 million in relief to around 1.4 million consumers for alleged deception in the marketing of credit card add-on products.

The CFPB has also hit Bank of America with a $20 million civil penalty for allegedly charging 1.9 million consumers for credit monitoring and credit reporting services that they did not receive.

"We have consistently warned companies about illegal practices related to credit card add-on products," CFPB Director Richard Cordray said Wednesday. "Bank of America both deceived consumers and unfairly billed consumers for services not performed. We will not tolerate such practices and will continue to be vigilant in our pursuit of companies who wrong consumers in this market," he added.

The alleged deceptions took place between 2010 and 2012.

Among other things, Bank of America is said to have misled consumers about the cost of coverage provided under two credit card payment protection products, "Credit Protection Plus" and "Credit Protection Deluxe." The products were intended to help customers in times of hardship or other life events such as college or retirement.

Bank of America telemarketers reportedly also misrepresented the sign-up process for these products, leading customers to believe there were more steps involved when, in fact, they had been signed up for the products during the calls, and being charged for them. The bank allegedly also told customers that protections provided by the products would last longer than the duration stipulated under the contract, and promoted a $25,000 death benefit that was never provided.

CFPB says Bank of America also:
  • Unfairly charged consumers for interest and fees, sometimes pushing those customers over their credit card account limits. This led to additional fees being charged; and
  • Failed to monitor consumer accounts for signs of fraud and identity theft, as promised.
Under the terms of the order, Bank of America will be prohibited from marketing any credit protection or credit monitoring add-on products until it submits a compliance plan, the CFPB said. The bank will also end all unfair billing practices and repay impacted consumers.

More actions will be brought against other banks that may have misled or overcharged credit customers, a senior agency official told Politico .

NCUA clarifies hearing comments on supplemental capital

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WASHINGTON (4/10/14)--The National Credit Union Administration has "very limited statutory authority" to establish supplemental capital that would benefit federally insured, consumer credit unions by enhancing their net worth for prompt corrective action purposes, agency general counsel noted in a follow-up letter to a Tuesday House Financial Services Committee hearing at which he testified.
 
During the hearing, Rep. Brad Sherman (D-Calif.) asked NCUA General Counsel Mike McKenna a series of questions regarding the NCUA's risk-based capital proposal, including one about supplemental capital as it relates to the RBC plan. The follow-up letter to committee leadership is intended to provide greater clarity on McKenna's answer, the agency said.
 
McKenna in response to Sherman said the agency could consider allowing credit unions greater access to supplemental capital as it finalizes proposed RBC regulations.
 
In his clarification letter, he noted that with the exception of low-income designated credit unions, Congress has limited the definition of "net worth" to retained earnings as defined by generally accepted accounting principles.
 
"Therefore, unless Congress amends the statutory definition of 'net worth,' other forms of capital, including supplemental capital, cannot legally be counted as 'net worth' for federally insured, consumer credit unions, other than those with low-income designation."

The Credit Union National Association has a different interpretation of the credit union capital statute. CUNA maintains that supplemental capital could be used for risk-based capital purposes under a regulatory proposal without legislative changes.

McKenna, in his letter to lawmakers, also noted NCUA concerns that a credit union's inability to raise capital outside of retained earnings limits its ability to serve its members. He reiterated NCUA's support for the Capital Access for Small Business and Jobs Act (H.R. 719).  That legislation would give credit unions an additional tool to promote capital stability by issuing supplemental capital that would count as net worth.

The NCUA general counsel concluded his letter by offering to work with House Financial Services Committee members on H.R. 719 or any similar proposal that would increase access to supplemental capital for "healthy, well-managed" credit unions.

Tighter rules may be on the way for alternative currencies

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WASHINGTON (4/10/14)--Money-laundering and know-your-customer controls will need to be applied to virtual currency transactions such as those made through bitcoin, U.S. Attorney General Eric Holder told U.S. House Committee on the Judiciary members this week.
 
These controls would help fight illegal activity on these marketplaces, Holder said ( Finextra.com April 9). The Department of Justice is working with financial regulators to assess the issue, Holder said, noting that the popularity of alternative currencies
among criminals has created a new issue for law enforcement and regulators alike.
 
The new government attention has made some fear that tightening regulations could tighten the online currency business, Finextra.com wrote.

The question is not if the government will regulate online currencies, but when and which agency will oversee the transactions, MarketWatch.com reported (April 9).
 
There must be regulation, Boston University professor Mark Williams told participants at a recent MarketWatch panel discussion held in New York. Consumer protection must be a focus, he added.
 
Bitcoin Investment Trust creator Barry Silbert argued that bitcoin is regulated, noting that the Financial Crimes Enforcement Network has released guidance on virtual currencies. Silbert said the Federal Reserve, Securities and Exchange Commission, Commodity Futures Trading Commission and the Federal Trade Commission are not likely to regulate the nascent currency.
 
State regulators and the Consumer Financial Protection Bureau may be the bodies in charge of rulemaking for bitcoin, he said. The CFTC may develop regulations if bitcoin derivatives are created, he added.

Committee patent reform vote pushed back two weeks

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WASHINGTON (4/10/14)--Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) said Wednesday that although the committee has made "enormous progress" on complex issues involved in its patent reform bill, the lawmakers "need additional time to draft the important provisions" that have been the subject of most recent discussions.  

Therefore, he again pushed back the committee's scheduled vote on the bill known as the Patent Transparency and Improvements Act (S. 1720). 

"I have talked to many senators on both sides, and because I want to be sure everyone is comfortable with how these pieces fit together, I will circulate a manager's package the day we return from recess, and the Judiciary Committee will consider that legislation the first week we are back," Leahy said in a statement released Wednesday.

On Friday, Congress adjourns for a two-week Spring District Work session.