CUNA Comment Letter

Regulatory Review

August 1, 2007

Regulatory Review (2007)
Office of General Counsel
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428

Re:     Regulatory Review (2007)

Dear Sir or Madam:

On behalf of the Credit Union National Association (CUNA), I appreciate the opportunity to file comments in response to the agency’s Annual Regulatory Review. CUNA is the nation’s largest trade organization for credit unions, representing about 90% of the approximately 8,500 state and federal credit unions in this country, which serve 87 million members.

Under the agency’s policy, the National Credit Union Administration (NCUA) reevaluates one-third of its current rules each year and all rules are reviewed every three years. Also, under the Economic Growth and Regulatory Paperwork Reduction Act, NCUA and other regulators are required to seek comments from stakeholders and report to Congress on the agency’s efforts to minimize or eliminate unwarranted, outdated, or excessive regulations.

For credit unions, which are one of the most highly regulated businesses in this country, these reviews are very important, and CUNA commends the agency’s efforts to identify unnecessary and/or overly burdensome regulatory requirements that have been imposed on federally insured credit unions. Our comments on the particular rules listed in the notice for consideration as well as recommendations for improving the review process are addressed below.

Bank Secrecy Act

Before commenting on the issues that are the subject of the review, however, we would be remiss if we did not acknowledge the growing credit union concerns regarding Bank Secrecy Act examination issues, the overarching regulatory issue for a number of credit unions. In that connection, we have met with all three NCUA Board members to draw attention to these concerns as well as with officials at the Financial Crimes Enforcement Network and other officials. As the NCUA Board is aware, CUNA has recently formed a Bank Secrecy Act Task Force, which is collecting information from credit unions on BSA regulatory costs and problematic issues. We plan to share a summary of that information with regulators as well as recommendations for improving BSA implementation. In the meantime, we urge NCUA to redouble its efforts to work with the other regulators to identify ways to reduce BSA regulatory burdens and improve the BSA examination process.

Summary of CUNA’s Views

• With respect to the statutory provisions on credit union service organizations (CUSOs), we believe the one percent limit on federal credit union (FCU) investments in CUSOs should be eliminated as well as the one percent limit on loans from FCUs to CUSOs.
• We also urge NCUA to reconsider one aspect of its rules regarding CUSO financial statement audits to allow consolidated audits with respect to majority owned CUSOs.
• For fidelity bond coverage, we recommend that NCUA employ net worth standards under prompt corrective action to permit, for example, well-capitalized credit unions to qualify for the higher deductible. CUNA also supports a waiver process under which credit unions that no longer qualify for the higher deductible could have more than the 30 days in the proposal to obtain the required coverage.
• For leases, we believe that credit unions should determine for themselves whether obtaining a full assignment is necessary to protect their interests. Also, under current leasing rules for federal credit unions, the estimated residual value may not exceed 25% of the original cost of the leased property, unless the amount above 25% is guaranteed. The unguaranteed residual value limitation is too restrictive and would place credit unions at a competitive disadvantage with other financial institutions.
• CUNA and the credit union system strongly support accuracy and transparency in credit union financial statements and regulatory reports.
• Annual privacy notices should no longer be required and current privacy notices should not be changed for credit unions.
• We urge NCUA to support legislation to permit federal credit unions to operate full service trust departments if they so choose.
• The $250,000 threshold for requiring real estate appraisals should be increased.
• CUNA supports the member business loan (MBL) provisions in the Credit Union Regulatory Improvements Act (CURIA) and believes NCUA could also eliminate certain provisions that are included in the current MBL rules.
• Credit unions should only be required to display the official sign on the home page of their internet websites.
• We urge NCUA to exempt credit unions eligible for the regulatory flexibility program from the leasing requirement that they rely on a maximum residual value of 25% for the purpose of meeting the full payout test. We also encourage NCUA to reduce the frequency of its examinations of Reg Flex credit unions.
• The share insurance rules could be improved by including the examples as part of official staff commentary that would follow the rules, similar to the approach the Federal Reserve Board has taken with regard to consumer protection rules.
• The process for obtaining comments from credit unions on the Regulatory Review could be improved. For example, the notice requesting comments should be more prominently featured on the agency’s website.

Discussion

Credit Union Service Organizations

While we support authority for NCUA to determine by regulation rather than statute the appropriate limitations for FCUs’ involvement with CUSOs, the Credit Union Regulatory Improvements Act of 2007 would take an important step in facilitating the development of CUSOs by raising the limits that govern FCU CUSO loans and investments and we appreciate NCUA’s support.

We do not believe this should be the only regulatory relief involving CUSOs however, We recommend NCUA reconsider one aspect of its rules regarding CUSO financial statement audits. As NCUA has indicated, generally accepted accounting principles (GAAP), specifically Accounting Research Bulletin 51, Consolidated Financial Statements, allows a credit union that is the majority owner of a CUSO to procure a consolidated audit.

However, NCUA has limited this to wholly- owned CUSOs. The agency’s reasoning is that this step will help ensure that full disclosure of potential risks is available to prospective minority investors in the CUSO. Under GAAP, subsidiaries generally are fully consolidated if the parent institution holds more than 50 percent of the subsidiary. We feel that this standard is the proper one to apply in the context of these rules and, therefore, encourage NCUA to permit a consolidated audit for a majority-owned CUSO if the CUSO so chooses.

Fidelity Bond and Insurance Coverage

CUNA generally supported the agency’s last changes in November 2005 to provide the maximum deductible of up to $1 million for credit unions that are qualified under the agency’s RegFlex Program and have assets of over $200 million. As we have previously, we also recommend that NCUA employ net worth standards under prompt corrective action to permit, for example, well-capitalized credit unions to qualify for the higher deductible. CUNA also supports a waiver process under which credit unions that no longer qualify for the higher deductible could have more than the 30 days in the proposal to obtain the required coverage.

Leasing

Requirement of a full assignment of the lease in an indirect leasing arrangement

We believe that credit unions should determine for themselves whether obtaining a full assignment is necessary to protect their interests. The Office of the Comptroller's (OCC) leasing rules do not require full assignment. The OCC rules require a perfected lien and treat the end user lessee as the obligor.

The decision to obtain a full assignment should be based on the credit union’s business practices. Some credit unions may very well decide that a full assignment is the best method to maintain full control of any situation that may arise, especially in the case of default and vehicle disposition.

The 25% unguaranteed residual value limit

Under current leasing rules for federal credit unions, the estimated residual value may not exceed 25% of the original cost of the leased property, unless the amount above 25% is guaranteed. The unguaranteed residual value limitation is too restrictive and would place credit unions at a competitive disadvantage with other financial institutions.

We believe that NCUA should adopt a flexible approach. An example is the OCC's approach, which allows banks to invest in operating leases up to an amount of ten percent of its assets, without the restriction regarding residual value limits. By way of background, when banks were first provided authority to invest in leases, they were limited to unguaranteed estimated residual values of no greater than 25 percent. However, banks were given an additional authority to engage in personal property leasing under the Competitive Equality Banking Act of 1987 (CEBA). Under this additional authority, banks are permitted to invest ten percent of their net assets in leases that do not meet the full-payout test. These "CEBA leases" are not subject to the 25 percent unguaranteed residual value limit. We also want to note that in a final rule regarding personal property leasing issued in 1996, the OCC noted that banks did not believe that a modification of the 25 percent residual value limit that was already in place was necessary because banks have the ability to use their CEBA leasing authority instead.

We believe that NCUA should follow a similar approach and provide more flexibility regarding the residual value limits. Leasing transactions differ based on such factors as the length of the lease term and the property that is involved. The length of the term and the varying rates at which different vehicles depreciate may both affect the decision regarding the appropriate residual value. Credit unions should have discretion to review these factors to make their own determinations, with the assistance of accepted residual leasing guides.

At the May 2000 NCUA Board meeting, the Board voted to retain the 25% threshold but questioned whether this was legally required. We urge NCUA to now revisit this issue and provide more flexibility with regard to this requirement, and we would welcome the opportunity to discuss this issue further.

Supervisory Committee Audits and Verifications

CUNA and the credit union system strongly support accuracy and transparency in credit union financial statements and regulatory reports. We believe the current regulations in Part 715 (Supervisory Committee Audits and Verifications) ensure that those statements and reports portray an accurate picture of the financial condition of the institution.

Also, in our view, a regulatory approach that allows credit unions to exercise their business judgment and voluntarily obtain attestations is preferable to unwarranted regulation that mandates such action.

Privacy

CUNA has submitted comments on two occasions in response to an interagency proposal to consider alternative forms of the annual privacy notices that financial institutions are required to provide consumers under the Gramm-Leach-Bliley Act. The following are CUNA’s significant comments regarding possible changes to these privacy notices and other issues with regard to privacy notices:

• The requirement to deliver privacy notices in their current form on an annual basis is unnecessary, especially for credit unions that are not required to provide their members with the right to opt-out of certain information-sharing.
• We do not at this time support changes in the privacy rules or statutes that would require changes in the language and format of the current privacy notices. Although credit unions recognize that the current privacy notices issued by certain types of financial institutions have been criticized as overly complex and have not proven useful for consumers, we are not aware of any such criticisms directed at credit unions. However, credit unions are always willing to review specific proposals that will help their members better understand how their information is shared.
• If the federal financial institution regulators are committed to changing the privacy notices, one possible suggestion to simplify them for both financial institutions and consumers is to require some type of notice only if the institution is required to provide the consumer with the right to opt-out of certain information-sharing. We believe this is the most practical approach because the opt-out option is generally the point in the process when credit union members can control and actually take action to limit information-sharing.
• To provide additional information to consumers without increasing the length of the privacy notices, the federal financial institution regulators could provide additional information, either through their websites or other means. Certain provisions of the current notices could also be deleted in that they are not particularly useful, such as the provisions with regard to safeguarding information, which is virtually the same in all the notices, and the provisions regarding the information that is collected, since the consumer is already aware of the information they provide to the financial institution.
• The current provisions regarding the sharing of information under joint marketing agreements need to be preserved. This allows information to be shared under these agreements without the need to provide consumers with the right to opt-out. This is necessary in order for credit unions and other smaller financial institutions to compete effectively with larger institutions that have the ability to share information among their various affiliates without providing their customers with the right to opt-out.

Fair Credit Reporting

NCUA and the other financial institution regulators are currently in the process of completing their rulemaking responsibilities under the Fair and Accurate Credit Transactions (FACT) Act. CUNA will continue to participate in this rulemaking process and will provide additional comments when future proposals are issued.

CUNA and others have previously filed several letters with the agency in response to the various FACT Act proposals, and we recommend NCUA review those files for additional suggestions regarding improvements in this area.

Incidental Powers

We urge NCUA to consider supporting at the appropriate time, legislation to permit federal credit unions to operate full service trust departments if they so choose.

Appraisals

Currently, real estate transactions of $250,000 or more must meet NCUA’s appraisal requirements, although appraisal requirements for member business loans may be waived. We believe this threshold should be increased. Such a change would minimize regulatory burden without undermining the objectives of the statutory requirements of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

Member Business Loans (MBLs)

CUNA has sought changes in the FCU Act regarding member business loans since 1998 and we commend NCUA for continuing its efforts to promote business lending at credit unions under safe and sound regulatory conditions. This includes the agency’s rule changes since 2003 to approve a number of amendments to Section 723, governing member business loans (MBLs).

While we continue to advocate legislative amendments, we believe further improvements to the MBL rules could be adopted by the NCUA Board to make member business lending more attractive and feasible for all types of credit unions.

Under Section 723, credit unions may apply for and obtain waivers from a number of regulatory requirements that apply to MBLs. These include appraisal requirements, aggregate construction and development loan limits, minimum borrower equity requirements for certain loans, loan to value requirements; and others. We urge NCUA to consider whether these issues are more in the nature of business judgment issues and could be addressed in a credit union’s member business loan policy approved by its Board, rather than detailed in regulations.

Alternatively, a Reg-Flex credit union does not have to obtain the personal guarantee of an MBL borrower, and we believe NCUA should reconsider whether this flexibility could be expanded to all adequately capitalized credit unions. For other MBL provisions subject to waiver, the Board should consider whether Reg-Flex credit unions could avoid other requirements currently subject to waiver without having to go through the waiver process.

Of course, one of the key amendments of CURIA would raise the MBL limit from 12.25% to 20% of assets, which NCUA and CUNA strongly support. Like NCUA, we believe credit unions should not be forced to operate with more restrictive MBL limits than those applicable to institutions such as thrifts. Another amendment would change the definition of MBLs to exclude loans of under $100,000 from the limits on MBLs. CUNA will continue to advocate strongly for these and other changes in CURIA that will enhance operations for credit unions.

Advertising

Currently, NCUA requires each insured credit union to display the official sign on the Internet pages where it accepts deposits or opens accounts. We encourage NCUA to only require credit unions to display the official sign on the home page of their internet website. We believe it is not necessary to have the official sign on web pages that are accessed after the member already views the home page in which the official sign is conspicuously displayed.

Regulatory Flexibility (Reg-Flex) Program

We urge NCUA to exempt Reg-Flex eligible credit unions from 12 CFR § 714.4(c) regarding leasing, which requires credit unions to rely on a maximum residual value of 25% for the purpose of meeting the full payout test. This threshold, which is not required by statute, results in credit unions having to purchase costly gap insurance to guarantee recovery of their investments in leased properties with relied-upon residual values that exceed 25%. This increases the cost of providing leasing services to members, and is an expense that other financial institutions are not required to incur, which places credit unions at a competitive disadvantage.

We also encourage NCUA to consider reducing the frequency of its examinations of Reg Flex credit unions. These credit unions do not pose the same level of safety and soundness risks as other credit unions. We also request that NCUA consider charging a reduced operating fee to Reg Flex credit unions, since a less frequent examination schedule would reduce NCUA’s operating expenses.

Share Insurance

Share insurance rules are complex, and credit unions appreciate the examples that are included in the appendix that accompany these rules. We believe the share insurance rules could be improved by including the examples as part of official staff commentary that would follow the rules, similar to the approach the Federal Reserve Board has taken with regard to consumer protection rules. Under this approach, the commentary would be subject to public comment before being issued in final form.

We also believe the commentary should include staff interpretations that could serve as an alternative to NCUA’s private opinion letters on certain share insurance issues. This should eliminate confusion for those who may be unfamiliar with the private opinion letters that address these issues.

Process for Identifying Rules for Review and Soliciting Comments

As we have stated before, we believe the process for seeking comments on regulations that are included in the agency’s Regulatory Review could be improved. For example, some of the rules included are already the subject of proposed changes or recent modifications. It is confusing for those rules to be included on the regulatory review list.

Also, the notice for the regulatory review is difficult to find on NCUA’s website. As a result, we are not sure if very many credit unions are aware that the Regulatory Review is underway and that they can comment.

It would be beneficial for NCUA to provide a report on its website each year on how it plans to address the recommendations it receives through this regulatory review comment process. We also recommend NCUA provide an annual synopsis of the comments that were provided to the agency which it did not act on.

Thank you for the opportunity to comment on these issues. If you have questions about our comments, please contact me at (202)508-6736.

Sincerely,

Mary Mitchell Dunn
CUNA Senior Vice President and Deputy General Counsel

Copyright © 2009 - Credit Union National Association, Inc.