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Judge rules investment products exempt from UBIT

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DENVER (11/13/09)— Income from investment products, such as stocks, bonds, mutual funds and annuities, made available by a state-chartered credit union to its members is not subject to unrelated business income tax (UBIT), according to a summary judgment ruling by a U.S. District Judge yesterday. The ruling in U.S. District Court for the District of Colorado was issued in the case of Bellco CU Union v. United States. Bellco is based in Greenwood Village, Colo. Judge Christine M. Arguello ruled that investment products made available by Bellco to its members were "substantially related" to Bellco's tax-exempt purposes, and therefore the income from those activities was, under the law, exempt from UBIT. At the same time, Arguello ruled that income from investment products sold to nonmembers was not "substantially related" to Bellco's tax-exempt purposes, and therefore could be subject to tax. Bellco’s investment advisors had some nonmember clients. Arguello deferred to trial, scheduled to begin Dec. 7, the treatment of Bellco's income from credit life and disability insurance and accidental death and dismemberment (AD&D) insurance. The judge found that some of the facts concerning these products remained uncertain and needed to be clarified. Arguello will preside over a trial to determine those facts. The judge also said the trial should address the issue of whether sales of certain insurance products to people who are not members of Bellco, but do belong to other credit unions, should be exempt from UBIT because the products further Bellco's tax-exempt purposes. Bellco brought the lawsuit with the support of the UBIT Steering Committee, which includes the Credit Union National Association (CUNA), CUNA Mutual, the American Association of Credit Union Leagues, and the National Association of State Credit Union Supervisors. CUNA General Counsel Eric Richard said the steering committee is pleased with the ruling on financial services and looks forward to dealing with the remaining issues at trial. “The court made clear that financial products sold to members are fully consistent with the purpose of credit unions and should not be taxable,” Richard said. “Bellco argued, and the court agreed, these financial and insurance products help promote thrift on the part of CU members.” Richard said next month’s trial gives Bellco the opportunity to make its case as to why income derived from credit life and disability insurance, as well as royalties from AD&D, should not be subject to UBIT. Bellco has challenged an IRS assertion that UBIT is due on three of its products, and has asked the court to grant a refund of $199,293 in tax that was paid on income from AD&D insurance, credit life and disability insurance, and financial products and services in 2000, 2001 and 2003, plus statutory interest. Earlier this year, the U.S. District Court for the Eastern District of Wisconsin, following a jury trial, ruled that Community First CU of Appleton, Wis. was exempt from UBIT on income from credit life insurance, credit disability insurance, and GAP coverage, because those products were "substantially related" to the credit union's tax-exempt purposes as a state-chartered credit union.

Corporate CU plan 1 deposit on NCUA meeting docket

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ALEXANDRIA, Va. (11/13/09)--The National Credit Union Administration (NCUA) has confirmed that it will unveil its long-awaited proposed rules on corporate credit unions at its upcoming monthly board meeting, to be held Nov. 19 here. While the exact details of the proposed rules are not yet known, the NCUA has provided some information on what the new guidelines could entail. Specifically, the agency has indicated that new capital standards that call for a 4% leverage ratio, which will include retained earnings and paid-in capital from members, could be part of the plan. The proposal is also expected to address concentrated risks in mortgage-related securities and other asset-backed securities and set general rules on executive compensation for corporate credit union leadership. Another issue of importance on the NCUA docket is the National Credit Union Share Insurance Fund premium and 1% deposit. While there has been some speculation that the 2010 share insurance assessment could fall between 15 and 30 basis points, NCUA board member Gigi Hyland has publicly stated that the NCUA could not predict the amount of the assessment in 2010 due to the unknown nature of future expenses, share growth, investment yields and resolution costs. The NCUA will also consider its monthly insurance fund report at the meeting. The NCUA’s 2010/2011 operating budget, its overhead transfer rate, and its operating fee scale will also be discussed during the open portion of the meeting. The NCUA approved a tentative fiscal 2010 budget of $189.97 million last year. As is routine, a closed session of the NCUA board will follow the early open session.

Regulation is the better overdraft approach CUNA

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WASHINGTON (11/13/09)--The Federal Reserve Board's final rule on overdraft protection plans, which was released on Thursday, “should give Congress pause before it proceeds further with the various legislative proposals that are now pending,” according to Credit Union National Association(CUNA) President/CEO Dan Mica. The Fed rule, specifically, would require credit unions and other financial institutions to obtain consent from consumers before they could be charged overdraft fees for ATM and one-time debit transactions. The rule, which will go into effect on July 10, also requires credit unions and other financial institutions to fully disclose the overdraft services, the fees, and the consumer’s right to opt-in, and ensures that members or customers that do decide to take part in the overdraft protection service may cancel the service at any time. (See related story: Opt-in featured in Fed overdraft rules.) Sen. Christopher Dodd (D-Conn.) and Rep. Carolyn Maloney (D-N.Y.) last month each introduced bills aimed at addressing overdraft fees by prohibiting them unless the member or customer exercises the option to opt-in to the program. Dodd's legislation only requires the opt-in provisions for ATM and debit card transactions, while Maloney's bill would impose opt-in requirements for all transactions. Both pieces of legislation are awaiting committee action on their respective sides of Congress. While the Fed rule “may present compliance challenges for certain credit unions,” Mica said that the rule does not present the same challenges or restrictions that are included in either piece of legislation. Those include restrictions on the amount and frequency of overdraft fees or requirements that force financial institutions to provide same-day notification to consumers when an overdraft is paid or notification if an ATM transaction will result in an overdraft. “CUNA's position has been that a regulatory approach to these issues is far preferable than these legislative initiatives,” Mica said. CUNA is analyzing the rule, and will provide credit unions with a more in-depth explanation of how the rule could impact their business practices as soon as possible.

Inside Washington (11/12/2009)

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* WASHINGTON (11/13/09)--The Federal Deposit Insurance Corp. (FDIC) was expected to provide clarification Thursday on how to treat securitized loans at failed banks (American Banker Nov. 12). The move would significantly impact investors if the FDIC took ownership of the assets. Current policy keeps the assets off a failed bank’s books, but next year, a change in accounting rules could mean the banks may have to place the assets back on the books. As such, investors may rethink their participation in securitizations if the FDIC would later claim them ... * WASHINGTON (11/13/09)--A proposed fund to pay for the resolution of systemically significant institutions is triggering questions from the financial services industry. Senate and House bills would require large institutions to fund an assessment after a systemic collapse, but the House Financial Services Committee is expected to propose a prepaid system that would require institutions to pay before a failure. Rep. Luis Gutierrez (D-Ill.) is expected to release an amendment that would require institutions with more than $10 billion in assets to pay into the fund. House Financial Services Committee Chairman Barney Frank (D-Mass.) said he supports the move (American Banker Nov. 12). The topic of a resolution fund has surfaced as a significant debate topic recently because the Federal Deposit Insurance Corp.’s (FDIC) Deposit Insurance Fund reached a high of $5.28 billion in 2008 but is now insolvent. Some observers said the proposed resolution fund would have to be “huge.” William Isaac, former FDIC chair, called the reserves a “big slush fund” ... * WASHINGTON (11/13/09)--The Federal Housing Administration (FHA) announced that its reserves have fallen to a record low after another drop in home prices ( Nov. 12). The loan insurance ratio decreased to 0.53% in the year ended in September from 3% in 2008. FHA said it would tweak its risk models in case the fund falls below zero, which would trigger taxpayer aid. Congress requires the FHA is required to maintain a 2% threshold. The FHA, with Fannie Mae and Freddie Mac, accounted for more than 90% of U.S. home loans in the first half of 2009 ...

Opt-in featured in Fed overdraft rules

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WASHINGTON (11/13/09)--The Federal Reserve Board's final rule on overdraft protection plans, which would require the consent of consumers before they could be charged overdraft fees for ATM and one-time debit transactions, was released on Thursday. According to the Fed, the overdraft rule also prohibits credit unions and other financial institutions from “discriminating against consumers who do not opt in” to overdraft plans by requiring them to provide those consumers with identical account terms, conditions, and pricing to those given to customers that have opted in to overdraft plans. The final rules, which are issued under Regulation E, would require credit unions and other financial institutions to fully disclose the details and fee structure of the overdraft service. Financial institutions also may not require that a consumer opt-in to ATM and one-time debit card overdrafts in exchange for having overdrafts paid on checks under the terms of the new rule. Members and customers that have elected to accept the overdraft service will also have the right to cancel that service in the future under the Fed rule. Fed Governor Elizabeth Duke in a release said the Fed rule would “help consumers better understand the terms and conditions of overdraft services” and help them to “avoid fees when these services do not meet their needs." The rule does not cover check transactions, and will apply to all consumers, including existing account holders. The Credit Union National Association had supported an opt-in feature if it was limited to debit and ATM transactions. However, CUNA said it would only back this feature if it was limited to new members, due to the potential operational difficulties of applying such a requirement retroactively to existing member relationships. The rule will come into effect on July 1, 2010. Both the House and Senate have been working to address overdraft fees through separate pieces of legislation. Senate Banking Committee Chair Sen. Chris Dodd (D-Conn.) recently introduced legislation that would force financial institutions to provide customers with the ability to choose whether or not they wish to participate in an overdraft program. Rep. Carolyn Maloney, (D-N.Y.) has also recently offered similar legislation. Commenting on the Fed rule, Dodd said that legislators "need to do far more to protect customers from abusive bank products." While Maloney said that the Fed rule was a "good, solid step forward," she said in a statement that there is still a "need for Congressional action on this issue." Credit Union National Association President/CEO Dan Mica, however, indicated that further legislative action on overdraft fees may not be prudent. (See related coverage: Regulation, not legislation, is right overdraft approach: CUNA.)