RegWatch - CUNA Marketing & Business Development Council

CUNA Regulatory Affairs (edited by the CMBDC Business Development/Legislation Committee)
July 15, 2008 | COMMENTS

Regulatory Issues of Interest to CUNA Marketing & Business Development Council Members

In This Issue:

• Chairman JoAnn Johnson’s Upcoming Departure from NCUA
• CUNA Comments on Proposed Revisions to CUSO Regulations
• CUNA Comments on Proposed Amendments to Low-Income Definition
• CUNA Comments on NCUA’s Proposed Changes to Its Advertising Requirements
• Fed Clarifies Liability Rules on Electronic Remotely Created Checks

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CHAIRMAN JOANN JOHNSON'S UPCOMING DEPARTURE FROM NCUA  

Come August 1, there will be a new Chairman at NCUA – Mr. Mike Fryzel, an attorney and former credit union state regulator. We will be writing more about the new chair in subsequent issues of RegWatch.

For now, JoAnn Johnson is still heading up the agency and will officiate at the July 24 th NCUA Board meeting. Meanwhile, the agency held a farewell gathering for her July 2 nd . Dan Mica, Ryan Donovan and I attended on behalf of CUNA.

At the ceremony, Chairman Johnson noted she was staying on to enable Mr. Fryzel to conclude his affairs before assuming the mantle of chairman.

Dan Mica was among those offering best wishes to Chairman Johnson, and he recognized her for her deep appreciation of the credit union system as well as for credit union members, and the need for financial literacy for consumers from all walks of life.

NCUA Executive Director Len Skiles noted that she has been an ideal boss in that she listened to staff, had a strong moral compass, and was genuinely concerned about individuals. He noted that she testified to Congress more than any other NCUA chair and that a number of issues have been addressed since she came to NCUA in 2002, including data collection.

Chairman Johnson is returning to Iowa when her tenure concludes, and we wish her well in all her future endeavors.

-  Mary Dunn, SVP and Deputy General Counsel

CUNA COMMENTS ON PROPOSED REVISIONS TO CUSO REGULATIONS

CUNA submitted a comment letter to the National Credit Union Administration 's (NCUA) proposal to amend its Credit Union Service Organization (CUSO) regulations. In our letter, we commend NCUA for its efforts to expand CUSO activities by adding new categories and more examples of approved services.

CUNA, however, urges NCUA to further enhance CUSO operations by permitting CUSOs to choose from the range of activities permissible for federal credit unions, including indirect automobile lending and the sale of loan participation interests in credit card portfolios to credit unions. In its letter, CUNA clearly stated that it does not support NCUA's effort to expand the CUSO regulations to give NCUA authority to examine the books and records of state credit union CUSOs and to regulate separateness of state credit unions and CUSOs.

In addition, our letter stated that we do not agree that all federal credit unions with a net worth below 5% should have to seek prior approval from NCUA to recapitalize an insolvent CUSO; credit unions with 4-5% net worth should only be required to give prior notice to the agency. CUNA also does not support removal of the regulation allowing requests for agency approval of new CUSO activities.

Click here for a copy of the letter.

-  Mary Dunn, SVP and Deputy General Counsel

CUNA COMMENTS ON PROPOSED AMENDMENTS TO LOW-INCOME DEFINITION

CUNA recently commented on NCUA's proposal to amend the definition of “ low-income ” federal credit unions as recommended by the agency's Outreach Task Force . Our letter noted that we g enerally do not object to the proposed change in the definition from one that is based on “ median household income ” to one that is based on “ median family income. ”

We do, h owever, urge the agency to permanently ' grandfather' existing low-income credit unions, to implement a waiver process allowing individual credit unions to qualify for or retain “ low-Income ” status, and to consider some other important modifications . As is also stated in our comment letter, we suggest that the definition include all of those whose incomes are at or below 80% of the area or nation ' s income standards, and that the final rule include state-chartered federally insured credit unions.

Click here for a copy of the letter.

- Mary Dunn, SVP and Deputy General Counsel

CUNA COMMENTS ON NCUA'S PROPOSED CHANGE TO ITS ADVERTISING REQUIREMENTS

CUNA commented on NCUA's proposed notice of rulemaking that would make changes to the requirements for use of the official insurance sign and official advertising statement. More specifically, the proposal would allow an insured credit union to:

• Use the official statement, “This credit union is federally insured by the National Credit Union Administration;”
• Use a condensed statement, “Federally insured by NCUA;” or
• Simply display the official insurance sign in their advertisements.

Currently, insured credit unions are permitted to use the condensed statement only if accompanied by the official sign.

In its comment letter, CUNA stated how it believes the proposal to be a positive step in the right direction towards assisting federally insured credit unions to meet their insurance advertising requirement. CUNA supports the effort and encourages NCUA to continue looking for additional ways to facilitate compliance for credit unions with all of their regulatory responsibilities.

- Luke Martone, Regulatory Research Counsel

FED CLARIFIES LIABILITY RULES ON ELECTRONIC REMOTELY CREATED CHECKS

A new payment process for remote transactions that utilizes the check system has recently emerged. The process promises merchants quicker clearing times and access to more consumer accounts.

The new process builds on the concept of remotely created checks (RCCs) and begins with remote payment instructions for goods or services purchased through the Internet or telephone. The instructions are converted to an electronic “template” and then further converted to an imaged check for clearing. Sending imaged checks for clearing through the Fed or other check clearing networks enables vendors to debit more checking accounts, including those that cannot be debited through ACH.

The problem, says Rich Oliver of the Retail Payments Office of the Federal Reserve in a memorandum to depository institutions, is that because this practice does not begin from an original paper item, the payments do not fall under check law. The Reserve Banks cannot provide Check 21 warranties and will look to the sending financial institution (BOFD) to recoup any losses suffered as a result of the electronic item. Although the Fed has not made an official determination, the Memorandum noted that this type of transaction may fall under the requirements of the Electronic Funds Transfer Act and Regulation E.

The Fed's Operating Circular 3 (OC-3) was amended—effective July 15, 2008—by adding that an item is not an “electronic item” unless the data was captured from a paper check. The revised Circular also adds a new warranty and indemnification section. The sending institution warrants that the data is an “electronic item,” as defined, and indemnifies the Reserve Banks from any loss if the data is not an electronic item. This means that if the BOFD presents an imaged check that never existed in paper form to the Reserve Banks, the BOFD will have breached an express warranty and will assume liability for any losses incurred by the Fed.

In response to these concerns, some vendors have come up with a creative way to ensure compliance. The data given by shoppers is used to create paper checks (RCCs), which are then destroyed soon after being scanned for digital imaging. This ensures that Check 21 and other applicable check laws apply.

A credit union with merchant-members choosing to use this type of payment service for which the credit union becomes the depository institution should understand the type of payment they initiated and its potential liability. For instance, when online purchases are made using the “pay anyone” option, RCCs are generally used. It is important to know whether a paper check is printed before an imaged check is sent for clearing because the credit union will be providing warranties and assuming liability for the legitimacy of the item.

Click here for a copy of the Fed's memorandum and here for the Fed's Operating Circular 3.

-   Lilly Thomas, Assistant General Counsel