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CU System briefs (04/05/2010)

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* MERRILL, Wis. (4/6/10)-- Linda L. Osness, executive vice president-financial services of Park City CU, Merrill, Wis., died March 31 at her home of a massive heart attack. She was 60. She had worked for the credit union, the former Cooperative League CU, since graduating from high school. She was honored for her 40 years of dedication in October 2007. She was active in the School to Work Program and the Youth Apprenticeship Program with the MAPS district and helped establish the branch office at Merrill Senior High School. She also coordinated the establishment of branch offices in Tomahawk, Minocqua and Rhinelander. She served as co-captain of Park City CU's Relay for Life Team and was recognized by the Wisconsin Credit Union League for her efforts. She is survived by seven brothers and sisters, and many nieces and nephews. Services are today at 10:30 a.m. at Our Saviour's Lutheran Church, Merrill (Wausau Daily Herald April 3) ...

MidFlorida CU reissues cards from Heartland breach

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LAKELAND, Fla. (4/6/10)--MidFlorida CU says it is issuing 12,000 new debit cards after recent fraud attempts stemming from a data breach announced in 2009 by Heartland Payment Systems. Kathy Britt, MidFlorida chief operating officer, told area media that affected members received notices March 26 informing them they will receive new debit cards because of the continued risk of fraud. Members were asked to review their accounts for suspicious activity and to check their credit reports (BankInfoSecurity.com April 1 and The Ledger March 30). The $1.4 billion asset credit union has about 80,000 debit card holders and had replaced 5,000 cards in 2009, when the breach was made public. Heartland, a Princeton, N.J.-based payment processing company announced in January 2009 a breach had exposed information from 130 million credit and debit cards--the largest data breach on record At least one other financial institution--First National Bank of Durango, Colo.-- said it would replace 5,000 debit cards as the result of new fraudulent activity related to the Heartland breach, said Bank Info Security. The man responsible for the Heartland breach and others, Albert Gonzalez, was sentenced March 25 and 26 to concurrent 20-year sentences in prison.

California CUs shook up from quake

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SAN DIEGO (4/6/10)--Several credit union branches suffered damages from an 7.2 magnitude earthquake that hit Southern California and Mexico Sunday afternoon. The El Centro and Calexico branches of Sun Community FCU sustained substantial damages from the quake and will be closed until further notice, according to a notice posted on the credit union’s website. The credit union’s call center also is unavailable. Sun Community’s Imperial branch was open Monday from 10 a.m. to 5 p.m. The Brawley and Calipatria branches are fully functional, and ATMs at all locations are up and running. The Golden 1 CU, Sacramento, also has a branch in El Centro. The branch suffered minor damages but “everything is back to normal now,” said Tina Ramos-Ingold, California Credit Union League public affairs coordinator. The epicenter was in Mexicali, Mexico, southeast of Tijuana, Calif., but affected parts of Southern California and damaged buildings in Mexico-California border cities (The New York Times April 5). Two people were killed and more than 100 injured in Mexico. One person was injured in Calexico. About 100 aftershocks were reported, said The Associated Press (April 5). The earthquake took out three power lines in Calexico, and a gas leak forced an evacuation of about 300 homes. Electricity also was out in the city’s southeast area. “The U.S damage appeared to be limited to California's southeastern Imperial Valley in what was one of the strongest earthquakes to hit the region in decades,” AP said. “The shaking was felt hundreds of miles away in Phoenix and Las Vegas.”

Marriott to build hotel near GAC site

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WASHINGTON (4/6/10)--A District of Columbia Superior Court judge has given Marriott International the go-ahead to build a hotel across the street from the Walter E. Washington Convention Center--the site of the Credit Union National Association's (CUNA) Governmental Affairs Conference (GAC). CUNA's next GAC will be at the convention center Feb. 27-March 2, 2011. The city could break ground on the $537 million, 14-story Marriott Marquis hotel in late May or early June, said D.C. Attorney General Peter J. Nickles (The Washington Post March 31). On March 29, Judge Natalia Combs Greene dismissed a lawsuit brought by Wardman Investor, controlled by JBG Cos., which alleged the city acted illegally and showed favoritism in the bidding process. Last fall, the city agreed to finance the Marriott project with $206 million and give the development team a 99-year ground lease on city-owned land. The district had been trying to attract a convention hotel for 11 years. Nickles said that even if JBG appeals, the hotel will break ground. The judge's ruling doesn't affect countersuits against Wardman by the city, the Washington Convention and Sports Authority, and Marriott alleging the lawsuit was an extortionate plan to stop construction of the convention center hotel and force Marriott to renegotiate a Wardman Park's management agreement. JBG bought the Wardman Park Marriott hotel with another company five years ago. Ben Jacobs, managing partner of JBG, was quoted in the article as saying that in a flat hotel market, competition from a convention center hotel would threaten the Wardman..

Bellcos win moves UBIT victory further says CUNA

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DENVER and WASHINGTON (4/6/10)--A federal judge's ruling Friday--that Bellco CU of Greenwood Village, Colo., is not liable for unrelated business income tax (UBIT) in several significant areas--is a significant victory for credit unions, said Credit Union National Association (CUNA) General Counsel Eric Richard. The U.S District Court for the District of Colorado ruled Friday that income derived from credit life and disability insurance, sold directly or indirectly, as well as royalty income from accidental death and dismemberment (AD&D) insurance should not be subject to UBIT. The decision by U.S. District Judge Christine M. Arguello supplements the court’s ruling last November in the Bellco case that its commissions from vendor sales of financial products and services such as stocks and annuities to its members were “substantially related” to its tax-exempt purpose and so therefore not subject to UBIT. Last year in the U.S. District Court for the Eastern District of Wisconsin, a jury ruled Community First CU, Appleton, Wis., was exempt from UBIT on income from credit life insurance, credit disability insurance and GAP coverage. The Colorado decision “is a substantial victory in credit union court challenges to the Internal Revenue Service's (IRS) policy toward UBIT and its application to credit unions,” said Richard. Richard is a member of the UBIT Steering Committee, comprised of CUNA, CUNA Mutual, the American Association of Credit Union Leagues and the National Association of State Credit Union Supervisors. The committee supported Bellco when the credit union filed the lawsuit last May. “This is the second time in a row the courts have rejected the IRS’s analysis of how UBIT should apply to credit unions, and the combined actions in this case extended that tax-exempt determination beyond credit life and disability insurance and GAP to also include financial products and services and royalty payments on AD&D insurance activities," said Richard. “At some point the IRS is going to have to recognize the inevitable and will have to change its policy based on the court rulings that have now been established,” he added. The government had argued that credit union insurance products are a poor value for members and do not promote thrift. Its case relied heavily on "low loss ratios" experienced by the insurance company that worked with Bellco. Judge Arguello ruled that credit insurance is directly related to the credit union's tax-exempt purpose because it promotes thrift. "In the banking and credit union context, the concept of thrift is tied to sound financial management," she said. "Credit insurance does just that. It permits a borrower to guard against certain difficult circumstances and to know that, if the unfortunate event of death or a serious disability occurs, the borrower's family and/or assets would be protected. For a relatively marginal payment, the borrower buys peace of mind," she added. "None of the government's arguments convince the court otherwise. The government's basic theory is that credit insurance is a 'bad deal' and thus cannot promote thrift," Arguello wrote, adding that the low loss ratio used "simply indicates that the insurance product was purchased by people who had not used it--yet." "In short, nothing about the low loss ratio, standing alone, convinces the court that credit insurance cannot be--and was not--substantially related to Bellco's thrift function." She also noted that "the evidence does not show that profit was the primary motivation in offering credit insurance." The AD&D insurance royalties issue centered on whether the credit union played a passive role in marketing and administering the program. "Much of Bellco's time was spent on activities intended to protect Bellco's goodwill with its members and its member privacy rather than to actively promote the AD&D program or otherwise perform administrative services for that program," Arguello wrote. Bellco's work "was focused on protecting its intangible assets and was sufficiently insubstantial, so as to result in the income appropriately being considered royalties." She noted that the majority of hours logged were at Bellco's call center, answering basic calls from members asking about the AD&D program. Citing insufficient recordkeeping rather than the principles at issue in the case, the court ruled that Bellco was liable for UBIT tax on its Credit Insurance income for tax year 2000 and a portion of tax year 2001, and on its share of profits from the Credit Union Indirect Lending Association. The ruling came after a trial in which court heard testimony of credit union officers and employees, credit union members and credit union league officials, said Michael M. Conway, attorney for Foley and Lardner, who argued the case on behalf of Bellco CU. It shows that this was a considered decision based upon evidence, not just legal interpretation, he said.

Olympian noted marathoners join Cherry Blossom Run

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WASHINGTON (4/6/10)--Famous marathoners and running enthusiasts plan to participate in the Credit Union Cherry Blossom 10 Mile Run Sunday in Washington, D.C. They include Bill Rodgers, Boston Marathon legend and former Olympian Joan Benoit Samuelson. They will sign autographs and talk to media at the event. Lead sponsor for the race is PSCU Financial Services. The Credit Union National Association also is sponsoring the event. The run hopes to raise $4 million for Children’s Miracle Network hospitals. Runners have donated more than $150,000 in the online giving program for the 2010 run. Credit unions also provide volunteers to serve on race day. Entries to the race are determined by lottery. More than 27,000 people applied for 15,000 slots for this year’s run. Rodgers won 22 marathons in his career and set numerous records. He is a member of the National Track and Field Hall of Fame and the National Distance Running Hall of Fame. Samuelson earned an Olympic gold medal in 1984, won two Boston Marathons in 1979 and 1983, and holds numerous world and American records. At 50, she set the American 50-59 women’s record by finishing the 2008 Women’s Olympic Trials Marathon in 2:49:08. This will be her first appearance at the Cherry Blossom Run.

Chrysler temporarily suspends CU program

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LANSING, Mich. (4/6/10)--Chrysler has temporarily suspended its affiliate rewards program, including its arrangement with credit unions under the Invest in America (IIA) program, according to an e-mail message to CUCorp and the leagues. The program "will be temporarily suspended pending fast-track discussion with Chrysler senior management in April," said the e-mail, sent Thursday by Kim Irwin, vice president of IIA. "We are hopeful that the program will have no more than a 30-day interruption, but we will communicate more as soon as we know details." "This is not a reflection of Chrysler's perception of value of the IIA program. Rather, it has to do with executive management's management of all incentive programs with direction from the federal government," Irwin emphasized. "The IIA program and supporting credit unions have benefited greatly from an outstanding relationship with Chrysler Group LLC," said the e-mail. "Since inception, credit unions have sold over 103,000 Chrysler, Jeep, Dodge and Ram Truck vehicles through the IIA program. These sales generated over 101,000 loans totaling more than $2 billion and resulted in member savings in excess of $77 million." Irwin's message noted IIA has experienced a temporary suspension before, and IIA and Chrysler worked through it. "In fact, through your efforts, we have experienced significant Chrysler sales increases in 2010 as the program once again gained traction. We are likewise confident that we can do the same this time." Irwin asked credit unions for patience "as we help Chrysler address the financial challenges associated with the environment they operate in."

LEVERAGE is the new name for LSCUs service corp

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BIRMINGHAM, Ala. and TALLAHASSEE, Fla. (4/6/10)--The League of Southeastern Credit Unions has a new name for its service corporation--LEVERAGE. The company was created through consolidation by the Florida and Alabama Credit Union Leagues’ service corporations. LEVERAGE will offer audit and compliance solutions, human resources, lending, operations, executive search solutions, Sprint Mobile phone services and Office Depot solutions. “The name LEVERAGE is a natural fit for the LSCU Service Corp.,” said Patrick La Pine, LSCU president/CEO. “Everything we do for our credit unions and our business partners is to create an edge for them. The LEVERAGE brand will be a powerful resource for credit unions to maximize their future growth.” The relationship of the Business Services Division with Office Depot is saving credit unions 70% on office supplies, and the relationship with Sprint Mobile Services generated $300,000 in non-interest income for credit unions last year, the league said.

N.Y. Senate sets 15M for state CDFI fund

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ALBANY, N.Y. (4/6/10)--The New York State Senate has called upon Gov. David Paterson to direct $15 million for an initial capitalization of the New York State Community Development Financial Institution (CDFI) Fund. The Senate passed its resolution on March 24 as a part of its Majority Resolution for a Fair and Responsible SFY10-11 Budget. CDFIs are community-based financial institutions that focus on lending to low- and moderate-income people and communities. About 78% of CDFI clients are low-income, 70% are minorities and 63% are female, said the National Federation of Community Development Credit Unions. “In fiscal year 2009, there were 110 CDFIs in New York with more than $1.93 billion in loans outstanding to more than 100,000 customers, including businesses, affordable housing developers, community facilities, microenterprises and individuals,” said Melanie Stern, federation senior program officer and coordinator of the New York Coalition of CDFIs. “CDFIs are experts at leveraging funds, and according to research conducted by the U.S. Department of the Treasury, CDFIs leverage federal dollars with private dollars by an average of 20 to 1. Based on this figure, we estimate that a $15 million appropriation to the New York CDFI Fund will allow the state’s CDFIs to leverage an additional $300 million in private sector investments,” she added. The State Assembly has yet to pass its own resolution for $15 million for CDFIs. But Stern is optimistic because the Assembly has been a traditional champion for CDFIs in New York, Stern said. “The only reason this program exists at all is because members of the assembly kept it alive with yearly allocations of $1 million to $1.5 million to expand CDFI lending to minority and women-owned business enterprises,” she added. “Our coalition is hopeful that the assembly will follow through on its long history of support to CDFIs and pass a resolution with a similar recommendation to the governor.” New York CDFI legislation is unique in that it is modeled after the federal CDFI Fund to allow a full range of CDFI activities. “At the federal level, CDFIs have become central players in promoting economic recovery,” said federation President/CEO Cliff Rosenthal. “Under the Obama administration, the federal CDFI Fund has seen its yearly appropriation more than double from its all-time high under President Clinton. With $250 million requested by the president for 2011, there’s never been a better time for New York State to expand its support of CDFIs.”

NEW Bellco wins UBIT court ruling

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DENVER (Filed 11:55 a.m. CT 4/5/10)--A Colorado judge has issued a ruling in favor of Bellco CU, the Greenwood Village, Colo.-based credit union challenging the government's unrelated business income tax (UBIT). In the opinion issued Friday, U.S. District Judge Christine M. Arguello ruled that:
* Bellco CU is not liable for UBIT on its income from its Direct Lending Program and its Indirect Lending Program for the tax year 2003 and the portion of tax year 2001 for which it has accurate income records; * It is not liable for UBIT on its royalties from Accidental Death and Dismemberment (AD&D) insurance; * Because Bellco lacks accurate income records, it is liable for UBIT tax on its Credit Insurance income for tax year 2000 and a portion of tax year 2001; and * It is liable for UBIT on its share of profits from the Credit Union Indirect Lending Association (CUILA) because the credit union did not meet the evidentiary burden required to prove that its share of income from CUILA "did not, intentionally or inadvertently, include other lines of CUILA's business," which were not tax-exempt.
Bellco had argued that income derived from sales of credit life and disability insurance, as well as royalties from AD&D insurance, should not be subject to UBIT because they are substantially related to the credit union's purpose of promoting thrift and making credit available at fair and reasonable prices. It has also argued that income from a third party vendor's sales of AD&D insurance to its members were "royalties" not subject to UBIT. The government argued that credit union insurance products are a poor value for members and do not promote thrift. Its case relied heavily on "low loss ratios" experienced by the insurance company that worked with Bellco. "In the banking and credit union context, the concept of thrift is tied to sound financial management...Credit insurance does just that...For a relatively marginal payment, the borrower buys peace of mind," Judge Arguello wrote in the summary judgment. "Giving members a convenient way to purchase insurance that protects them, their families, and their assets in the event of a catastrophic event certainly qualifies as a mechanism for careful management of the borrowers' money. "None of the government's arguments convince the court otherwise. The government's basic theory is that credit insurance is a 'bad deal' and thus cannot promote thrift," Arguello wrote, adding that the low loss ratio used "simply indicates that the insurance product was purchased by people who had not used it--yet." "In short, nothing about the low loss ratio, standing alone, convinces the court that credit insurance cannot be--and was not--substantially related to Bellco's thrift function." She also noted that "the evidence does not show that profit was the primary motivation in offering credit insurance." Also at issue was whether AD&D insurance provides royalty income, which is exempt from UBIT. To earn royalties, the credit union must play a passive role in marketing and administering the program. "Much of Bellco's time was spent on activities intended to protect Bellco's goodwill with its members and its member privacy rather than to actively promote the AD&D program or otherwise perform administrative services for that program," Arguello wrote. Bellco's work "was focused on protecting its intangible assets and was sufficiently insubstantial, so as to result in the income appropriately being considered royalties." She noted that the majority of hours logged were at Bellco's call center, answering basic calls from members asking about the AD&D program. In the judgment on indirect loans, the judge noted that the conclusions equally apply in the indirect loan context. The government argued that the program offered a "single premium" product that was more expensive than credit insurance and that auto dealerships are motivated by profit. "Neither of these facts is sufficient to convince the court that the Indirect Lending Program was not substantially related to Bellco's thrift function," she wrote. The other two findings centered on a lack of evidence presented as to calculations of the income from certain credit insurance products. In an earlier opinion issued in November 2009, Judge Arguello ruled that Bellco's income from sales of "financial services," such as securities and annuities, to its members via a third-party vendor was not subject to UBIT. Bellco filed the lawsuit last May with support of the UBIT Steering Committee, which includes the Credit Union National Association, CUNA Mutual, the American Association of Credit Union Leagues and the National Association of State Credit Union Supervisors (News Now Dec. 15).