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CUNA Despite headwinds more gradual improvement in CU results

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WASHINGTON (8/31/10)—The Credit Union National Association’s (CUNA’s) economists, analyzing mid-year credit union call report data released yesterday by the National Credit Union Administration (NCUA), conclude that following the initial positive signs for credit union operations of the first quarter, most indicators continued to move in the right direction in the second quarter. This of course follows two of the most difficult years ever for credit unions operations in 2008 and 2009. Most significant, the economists noted, was the further improvement in credit union earnings in the second quarter. Although net income, or return on assets (ROA), was down slightly during the quarter, to 38 basis points (bp) of assets from 46 in the first, the drop was due to the corporate stabilization assessment of 13.4 bp of insured savings levied during the quarter. Net income before the separate National Credit Union Share Insurance Fund (NCUSIF) stabilization expenses actually rose from 48 bp in the first quarter to 79 bp in the second. This means, the economists said, that ROA for the first half, after stabilization expenses was 42 bp. Although that pales in comparison to the 90 bp to 100 bp that many credit unions became accustomed to before the recession, it represents a marked improvement from the near zero earnings of the previous two years. The most significant contributor to the earnings improvement was another decline in the provision for loan loss expense, from 115 bp of assets for all of 2009 to 82 bp in the first quarter and 73 in the second quarter. Other signs of improvement in credit quality were a reduction in net loan charge-offs, from 1.21% of loans outstanding in 2009 to 1.17% in the first quarter and 1.09% in the second. Credit unions’ average delinquency rate, which had soared from 0.68% in 2006 to 1.87% last December, has stabilized, dropping to 1.79% as of March and 1.77% as of June. “This remains a difficult economy in which to operate,” said CUNA Chief Economist Bill Hampel, “but it’s a big relief that conditions are no longer deteriorating as they were in the past two years. Most signs point to continued slow improvement in credit union results for the rest of the year. An ROA after both NCUA assessments of over 50 bp for the full year is very likely.” To CUNA’s economists, the only real surprise in the data was the slowdown in savings growth in the second quarter. Savings rose by only 1.6% on an annual basis in the second quarter. “This is very unusual considering the increase in household saving as a result of the recession,” Hampel said. Loan growth was even weaker at a 0.7% annual rate. “It appears that members are using their extra cash balances to pay down loans rather than to build savings balances,” said Hampel. “That’s not surprising considering the very low rates available on most savings accounts right now.” Use the resource link to access the complete data from NCUA.

Inside Washington (08/30/2010)

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* WASHINGTON (8/31/10)--The Obama administration will deploy an emergency loan program for the unemployed and a government mortgage refinancing effort to help homeowners after home sales decreased in July. The effort will launch in the next few weeks, said Housing and Urban Development Secretary Shaun Donovan Sunday on CNN (American Banker Aug. 30). Sales of new homes dropped to the lowest level on record. Purchases fell 12% from June, the weakest since data began in 1963. Donovan said it’s too early to determine whether the administration’s $8,000 first-time homebuyer credit tax credit will be revived. The credit expired April 30 ... * WASHINGTON (8/31/10)--Regulators of the Group of 20 (G-20) will meet next month in Switzerland to try and reach an accord on new banking rules that aim to prevent another financial crisis (The Wall Street Journal Aug. 30). Regulators last met July 26. Two large issues remain for the September meeting--size and timing, the newspaper said. Regulators will have to agree on the level of capital needed to cushion against risk. Basel officials suggested 5%, but some countries push for a lower buffer of 4% or 2%. Regulators also must agree on the date by which banks will have to comply with the new rules. Some have suggested 2020 as a good deadline, while others said a shorter time frame would force banks to protect themselves against another crisis. A schedule of about five years likely will be adopted, the newspaper added. The G-20 is planning two meetings in Basel the next few weeks ...

FHA designing new reverse mortgage option

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WASHINGTON (8/31/10)--The Federal Housing Administration (FHA) held a telephone briefing recently to inform the housing industry that it is looking at options to provide a lower-priced home equity conversion mortgage(HECM) option. An FHA spokesman told News Now that there has been no formal agency announcement because FHA is still working out details. But he confirmed it is FHA’s intention to “make the product more attractive while limiting FHA’s exposure to risk.” As reported by a number of news outlets, FHA is designing a reverse mortgage product it will call HECM Saver. It is also considering changes to its original HECM program. The HECM Saver is targeted to senior citizens who want to tap the equity in their homes to help cover medical costs, or even daily living expenses, according to an Aug. 30 article in American Banker. For a reduced up-front premium, a borrower would take 10% to 18% less in available funds than the standard home equity conversion mortgage provides.

CUs in advisory panel report on tax options

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WASHINGTON (8/31/10)--The Presidential Economic Recovery Advisory Board (PERAB) has released a comprehensive report on possible tax revisions, each intended to simplify the tax system, improve taxpayer compliance with existing tax laws, and reform the corporate tax system. The report represents a laundry list of options that the government could pursue in order to reform tax law, but is not a blueprint for government action. In fact, the board itself emphasized that it is “an outside advisory panel and is not part of the Obama administration.” Under Section IV, the corporate tax reform pages, and under the subhead of “Eliminate Other Tax Expenditures,” the report dedicates four lines to the possibility of eliminating the federal credit union tax exemption to raise revenue and “level the playing field.” ‘Unlike other financial institutions like banks and thrifts, credit unions do not pay corporate taxes on their income. This puts them at a competitive advantage relative to other financial institutions for tax reasons. Eliminating this exemption would raise revenue and level the playing field, but would clearly raise taxes on credit unions,” the report says in full. The subsection also discusses the low-income housing credit and special employee stock ownership plan (ESOP) rules. The PERAB, also known as the Volcker Commission because the 16-member panel is headed by former Federal Reserve Board Chairman Paul Volcker, released its 118-page report on Friday. Credit Union National Association (CUNA) President/CEO Bill Cheney said, “While it is always a grave concern to CUNA and credit unions to have the credit union tax status come into question, credit unions should be aware that the advisory board report is simply an exploration of all policy-change options. “The threat to the credit union tax status is always alive. Bankers are always pushing for tax advantages while attacking the tax status, which belongs to credit unions because of our not-for-profit, cooperative structure,” Cheney added. “The ‘level-playing field’ language is often employed by the banks to justify their hypocritical attack on credit union tax status. We will continue to educate policymakers regarding the credit union difference, which reinforces the uniqueness of credit unions, in structure and service, from other financial institutions.” Also included in the board’s report are tax-change options that involve subchapter S corporations, a structure sometime used by banks to reduce their tax obligation. Sections on at least six pages of the report discuss subchapter S arrangements. The report also details the lack of taxpayer compliance with current laws.

Court dismisses Corp. Central case v. US Central NCUA

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WASHINGTON (8/31/10)--A suit alleging breach of conduct, violation of bylaws, and more, against U.S. Central FCU was dismissed by the U.S. District Court for the Eastern District of Wisconsin earlier this month. Corporate Central CU (CCCU) filed suit in October 2009 seeking a refund of $6 million, which represents a portion of its membership capital shares balance from U.S. Central FCU. In addition to charging breach of conduct and bylaws violations, the complaint sought an injunction against the National Credit Union Administration (NCUA) to stop the agency from “continuing and enforcing a policy that violates Corporate Central’s constitutional right to equal protection,” and a declaration of CCCU’s “rights with respect to Corporate Central’s property.” The NCUA took over U.S. Central in early 2009, but was named in the suit because of its role as regulator, not conservator. The agency sought dismissal of the lawsuit last January. While rejecting portions of the agency’s motion to dismiss, District Judge Lynn Adelman granted the request on Aug. 19, finding that the NCUA’s actions had a “rational basis” and therefore did not violate constitutional equal protection under the Fifth Amendment. The judge wrote that the NCUA can take “any action that is necessary to put [U.S. Central] in a sound and solvent condition; and… (is) appropriate to carry on the business of [U.S. Central] and preserve and conserve the assets and property of [U.S. Central].”) The NCUA’s action to bar members from receiving refunds of excess MCS investments, which is key to CCCU’s suit against the agency and U.S. Central, “clearly furthers its interest in putting U.S. Central in a sound financial condition and thus has a rational basis,” the court decision said. The court declined to rule on CCCU’s breach-of-contract, violation-of-bylaws, and other state-law claims on the basis that those claims belonged in state court. The judge went on to opine that the NCUA’s decision “likely prevented a run on excess investment on members’ capital accounts, surely a desirable outcome.” The decision also noted that even if CCCU’s argument that the NCUA could have handled the situation differently is true, that does not negate the agency’s authority to take the action that it did. An attorney for CCCU, Daniel Kelly of Reinhart Boerner Van Deuren s.c., in Milwaukee, said his client “has no comment about the case at this time.” The NCUA also declined to comment except to endorse the court’s decision.

NEW Advisory panel issues report on tax options

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WASHINGTON (UPDATED 8/30/10, 2:05 p.m. ET)--The Presidential Economic Recovery Advisory Board (PERAB) has released a comprehensive report on possible tax revisions, each intended to simplify the tax system, improve taxpayer compliance with existing tax laws, and reform the corporate tax system. The report represents a laundry list of options that the government could pursue in order to reform tax law, but is not a blueprint for government action. In fact, the board itself emphasized that it is “an outside advisory panel and is not part of the Obama administration.” Under Section IV, the corporate tax reform pages, and under the subhead of “Eliminate Other Tax Expenditures,” the report dedicates four lines to the possibility of eliminating the federal credit union tax exemption to raise revenue and “level the playing field.” ‘Unlike other financial institutions like banks and thrifts, credit unions do not pay corporate taxes on their income. This puts them at a competitive advantage relative to other financial institutions for tax reasons. Eliminating this exemption would raise revenue and level the playing field, but would clearly raise taxes on credit unions,” the report says in full. The subsection also discusses the low-income housing credit and special employee stock ownership plan (ESOP) rules. The PERAB, also known as the Volcker Commission because the 16-member panel is headed by former Federal Reserve Board Chairman Paul Volcker, released its 118-page report on Friday. Credit Union National Association (CUNA) President/CEO Bill Cheney said. “While it is always a grave concern to CUNA and credit unions to have the credit union tax status come into question, credit unions should be aware that the advisory board report is simply an exploration of all policy-change options.” “The threat to the credit union tax status is always alive. Bankers are always pushing for tax advantages while attacking the tax status, which belongs to credit unions because of our not-for-profit, cooperative structure,” Cheney added. “The ‘level-playing field’ language is often employed by the banks to justify their hypocritical attack on credit union tax status. We will continue to educate policymakers regarding the credit union difference, which reinforces the uniqueness of credit unions, in structure and service, from other financial institutions.”