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IRS issues a new UBIT opinion

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WASHINGTON (8/5/09)—The Internal Revenue Service (IRS) has released a new Technical Advice Memorandum (TAM) stating that income derived by state-chartered credit unions from shared-branching arrangements, management services to other credit unions, certain CUSOs, and sales of financial management services and certain insurance products are subject to unrelated business income tax (UBIT). “We think this decision is clearly erroneous on multiple levels. Most basically, it fails to recognize the cooperative, interdependent nature of the credit union system as reflected in shared branching and management of one credit union by another,” said Eric Richard Tuesday. Richard is general counsel of the Credit Union National Association (CUNA). Richard also pointed out that the new TAM does not sufficiently analyze whether particular functions of credit union service organizations further the purposes of credit unions, which “should be the test of tax exemption.” This new UBIT TAM is the first such memorandum issued by the tax agency since it sent out a spate of such opinions in 2007. Two credit unions have filed suit against the IRS over its UBIT policies. Community First CU, based in Appleton, Wis., filed suit in January 2008 against the government after the IRS determined that certain guaranteed auto protection (GAP) and insurance products offered to members fall outside the credit union's main mission and are subject to UBIT. The credit union sought a $54,604 refund and a jury in May of this year found in the credit union’s favor. The latest TAM was drafted before the decision in the Community First case was issued. Bellco CU, Greenwood Village, Colo., also has filed a complaint against the IRS, seeking a refund of $199,000, based on UBIT taxes paid for 2000, 2001 and 2003. “The parts of this newest UBIT decision that deal with credit life and disability are at odds with the jury's decision in Community First, but this TAM was in the works long before that decision came down. It was officially issued to the credit union and the IRS agent in the applicable state in May, before the Community First trial,” CUNA’s Richard said. “Hence, even though the timing might look suspicious to outside observers, this TAM cannot be treated as a response to the Community First verdict,” he added. The CUNA UBIT Steering Committee will meet this week to discuss its next steps in UBIT strategy.

CUNA Overdraft plans consistent with CU mission

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WASHINGTON (8/5/09)—While a story in USA Today on Tuesday took issue with credit union overdraft protection programs, Credit Union National Association (CUNA) President/CEO Dan Mica explained that the programs are consistent with credit unions’ philosophy and mission to meet members’ financial needs and resolve short-term financial problems. Mica noted that, in the wake of the story, it is important for credit unions to communicate that overdraft programs are a way that mainstream lenders like credit unions can help consumers with a lower-cost option to such outlets as payday lenders and pawn shops. “Credit unions that charge fees for the programs do so in order to make the business model work on a service that a number of their members value and are willing to pay for,” Mica said, adding: “But the fact is, credit unions generally offer this service to save members the high cost and embarrassment of a bounced check." Typically, credit unions charge around $25 for an overdraft protection fee, while cumulative bounced check costs, including fees charged by merchants receiving the "bad" check, run as high as $50-$85 oer check. Both federal lawmakers and regulators are looking at financial institutions’ overdraft protections plans to determine is greater consumer protections are needed. For instance, in March Rep. Carolyn Maloney (D-N.Y.) asked her House colleagues to support a 2009 version of her earlier overdraft bill that failed to pass, the Consumer Overdraft Protection Fair Practices Act (H.R. 946). As CUNA has testified on Capitol Hill this year, CUNA staunchly backs intention to eliminate abusive practices associated with some bounce protection plans, but insists any law must create an equitable balance between those protections and the needs of service providers to be fairly compensated for the service and not subjected to unnecessary regulatory burdens.

Inside Washington (08/04/2009)

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* WASHINGTON (8/5/09)--The Federal Deposit Insurance Corp. (FDIC) issued a letter Monday urging financial institutions to look at potential loan losses. Each institution should “analyze the collectibility of its loans held for investment and maintain an allowance for loan and lease losses. After determining the appropriate historical loss rate for each group, management should consider those current qualitative or environmental factors that are likely to cause the estimated credit losses on the loans,” FDIC said. Failure to recognize losses could delay loss mitigation activity--such as restructuring junior lien loans to more affordable payments or reducing principal on such loans, the agency warned ...

Hood Highlights of NCUA tenure

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ALEXANDRIA, Va. (8/5/09)—Rodney Hood, recently reflecting on his term as National Credit Union Administration (NCUA) vice chairman, told News Now that he believes one of his unique contributions to the NCUA and credit unions was bringing about a culture of enterprise risk management to the board and to the system overall.
Click to view larger imageNCUA vice chairman Rodney Hood, who will leave the board once Deborah Matz has been confirmed, urged credit unions to "tell their story" to draw new members to their ranks.
Hood, who in late 2005 took the spot vacated by former NCUA Chairman Dennis Dollar, agreed to stay past his terms expiration date of April 10, 2009 until a new board member is confirmed. As Deborah Matz’s expected confirmation to the agency nears, Hood talked to the Credit Union National Association’s News Now about his board tenure. With the end of his term in sight, Hood urged credit unions to “continue to tell their story, to market their products, and to serve their members,” adding that now is the time to build on the positive momentum gained by recent increases in new share accounts and share deposits to grow market share for their institutions. Hood during the interview also hailed the success of the Blueprint 2020 program, which he marked as another hallmark of his time on the board. The program, which works with universities to create marketing, accounting, and other opportunities for interested college interns, is a “wonderful way of injecting talent into our system” and helps provide a succession plan for credit unions by bringing young people into the credit union movement as employees or, at a minimum, as members. The NCUA has also applied some of the lessons learned from the program to its own internship practices, according to Hood. While he admitted that there is still “a lot to be done” regarding the need for diversity within the credit union system, the NCUA can address this subject by “leading by example.” The fact that credit unions were “well positioned” coming into the current economic turbulence is helping them sustain themselves through what can be tough times. Still, Hood said, credit unions continue to do well in spite of the difficulties, with the number of shares in credit unions and, more generally, membership increasing as people hear about the failures of other financial institutions and opt to join a credit union. Recent improvements to the NCUA’s Centralized Liquidity Facility and the creation of a corporate stabilization fund will also help credit unions continue to serve their membership going forward, he said. While he supports the goal of consumer financial protections, Hood said that he is “troubled” by aspects of the proposed Consumer Financial Protection Agency that would take away some of the teeth from existing regulators. “I don’t see how this new group is going to be more effective than the groups” that work with institutions on a “day to day basis,” he added. Still, Hood said that “it bodes well” that the NCUA will remain independent under proposed changes to the federal financial regulatory structure, adding that the decision to allow the NCUA to retain its independence confirms that credit unions were not part of the problems that created the current financial difficulties. Hood said he is “excited” about welcoming Matz, who previously served on the board from 2002 until 2005, back to the NCUA. Hood said that the Obama administration’s nominee is an “excellent advocate for credit unions” who is “very attuned to the issues” that credit unions are facing. Hood said that he is currently exploring opportunities in the private sector, adding that he’s looking to stay in the financial services industry. News Now will also feature a discussion with NCUA board member Gigi Hyland in the near future.