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Inside Washington (12/30/2008)

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* WASHINGTON (12/31/08)--The Federal Register Tuesday published the National Credit Union Administration’s final rule amending credit union service organization (CUSO) regulation. The rule was adopted Dec. 18. The amendment, effective Jan. 28, adds two new categories to permissible CUSO activities: credit card loan origination and payroll processing services. New permissible activities under the board's action are related to the routine daily operations of credit unions and include: real estate settlement services; employee leasing and support; purchase of non-performing loans; business counseling and related services for credit union business members; and referral and processing of loan applications for members turned down by the credit union ...

Judge delays trial start in Colorado UBIT case

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WASHINGTON (12/31/08)--A federal judge has delayed the trial date of a Colorado credit union’s lawsuit against the Internal Revenue Service over the tax agency’s application of “unrelated business income tax” (UBIT). The change in the trial date, according to Credit Union National Association (CUNA) General Counsel Eric Richard, likely is not indicative of the judge’s attitude toward the case. “We have no reason to believe that the judge's action says anything about how this case is likely to turn out. Courts often reschedule trials just to manage their overall workload. "We anticipate the credit union party to the case will seek a prompt trial date at the appropriate time," Richard said. The trial date for the case, Bellco CU of Greenwood Village, Colo. vs. the United States (IRS), had originally been set for Aug. 31, 2009. On Dec. 22, however, U.S. District Court Judge Christine M. Arguello ordered that the date was “vacated.” She did not set a new trial date. According to CUNA’s Richard, the judge made the ruling without a request from either the credit union or government sides in the case. In the order, Arguello did not give reasons for her action, although she did indicate she would set a new date sometime after a status conference between the two sides in the action set for June 19. The credit union filed the lawsuit in May the tax agency’s UBIT policies toward credit unions. The complaint seeks a refund of $199,000, based on UBIT taxes paid for 2000, 2001 and 2003. For more information about UBIT, use the resource links below.

Banker survey shows similar compliance worries

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WASHINGTON (12/31/08)—Credit unions may be interested in a recent American Banker survey of compliance burden, said Credit Union National Association (CUNA) Senior Vice President of Compliance Kathy Thompson Tuesday, because the headaches related will sound so familiar. The Dec. 30 article, “In Compliance, More Turn to Specialists,” reports that bankers across the United States say compliance is getting tougher as regulatory burden increases and examiners’ scrutiny intensifies. President/CEO Tom Welch of $76 million-asset Pioneer Federal S&L in Dillon, Mont. kicked off the article saying he was told recently that seven examiners soon would be paying a visit over a four-week period. His last review, he said, involved four examiners and lasted closer to two weeks. The article is based on a survey American Banker conducted in October with Greenwich Associate LLC of Stamford, Conn. Polled were 308 bankers from institutions of all sizes. Of the respondents, 85% said they have a chief compliance officer or an equivalent position, up from 70% last year. Of interest, for 2008 all the banks in the survey with greater than $10 billion in assets said they have a chief compliance officer, compared with 84% of smaller banks—quite an increase from last year’s figures that reported 89% of the large banks and 70% of the small banks had one. The bankers also reported stunning jumps in compliance spending with 92% of the respondents saying it had increased in the past three to five years, and 64% of them called the increase significant. Survey respondents spend on average 6% of their annual revenue on compliance, but smaller banks spend a higher percentage than larger ones do, some reporting a number as high as 10%. One banker, Charlie Cross, president/CEO of $125 million-asset Cornerstone Bank of Eureka Springs, Ark., guessed that these higher compliance costs are a major factor when some small community banks decide to sell themselves. Thompson noted that credit unions and community bankers share a lot of similar concerns about compliance burden. "I was particularly taken with the observation of some of the community bankers interviewed who feel that in recent examinations they have been more scrutinized than their larger competitors because examiners feel less intimidated in trying to evaluate their operations and compliance efforts." Bankers said they expect the compliance burden to get even heavier in 2009 as the federal government, and in some cases state agencies, ratchet up regulatory requirements, particularly involving mortgage lending. As one banker stated, he hopes "common sense" will prevail. CUNA's Examination and Supervision Subcommittee is completing a survey of credit unions on their recent examination experiences and concerns about compliance burden. The results are expected to be released in early 2009.

Appraisal agreement an improvement says CUNA

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WASHINGTON (12/31/08)--The Credit Union National Association (CUNA) said Tuesday that a new agreement reached by the country’s two largest mortgage finance companies and the New York Attorney General on independent home appraisals promises to be much less burdensome to lenders. Fannie Mae and Freddie Mac reached an agreement last week with Andrew Cuomo intended to ensure the independence of home appraisals. CUNA had urged revisions to an earlier agreement arguing that there could have been significant burdens on credit unions and other small lenders associated with parts of the new Home Valuation Code of Conduct. One of the significant provisions of the original agreement would have required lenders to maintain a telephone and email hotline to address consumers’ appraisal complaints. This, CUNA warned, would have imposed significant new burdens on credit unions, the cost of which would have to be borne by credit union members. CUNA noted that consequence was particularly unfortunate in the current credit climate of higher costs for mortgage credit. Also, the original version would have required those involved in the appraisal process to be completely independent from the loan production staff, a provision with which CUNA also took issue. The new agreement will allow lenders to implement safeguards if it cannot guarantee this independence. The new agreement also dropped a requirement that would have prohibited the use of "in house" appraisals or appraisals prepared by affiliates, which was another improvement sought by CUNA. CUNA Senior Assistant General Counsel Jeffrey Bloch said CUNA’s analysis shows a much-improved agreement that better balances the need for appraisal independence with fewer burdens on credit unions and other lending institutions. He noted that the effective date for the final agreement has been moved back to May 1, instead of Jan. 1 as indicated in the original agreement.

New post-merger net worth definition effective today

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WASHINGTON (12/31/08)—Today is the day that the National Credit Union Administration’s (NCUA’s) new post-merger net worth definition goes into effect, changing the definition of a natural person credit union's net worth to include as capital the retained earnings of a credit union that is merging into it. The rule applies to credit union mergers taking place after today and the change is consistent for corporate credit unions. The new definition, in effect, implements a statutory correction that was carried in The Financial Services Relief Act of 2006, which addressed accounting anomalies that have arisen since PCA requirements were first instituted. At the time PCA requirements were mandated in 1998 by the Credit Union Membership Access Act, the "pooling method" was used for the financial reporting of a credit union merger. This allowed the acquiring credit union to combine its own retained earnings with that of the merged credit union for determining the post-merger net worth ratio for purposes of complying with PCA requirements. In 2001, Financial Accounting Statement (FAS) No. 141 replaced the "pooling method" with the "purchase method" for business combinations, with the effect that an acquirer's net worth would not increase as a result of the merger. This potentially reduces the post-merger net worth. The Financial Services Relief Act of 2006 essentially reversed that policy by expanding the PCA definition of "net worth" to incorporate the retained earnings of the merged credit union. This would also apply to other combinations, such as purchase and assumption transactions. At the time the change was proposed in July, NCUA staff members noted that the new regime for net worth calculation in mergers would not reinstate the "pooling method," but would have a similar practical effect. Use the resource links below to read the NCUA rule and the Credit Union National Association’s final rule analysis.