ComplianceConnectionMASSACHUSETTSCREDIT UNION LEAGUE, INC.

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February2010

The Compliance Connection is a publication of theMassachusetts Credit Union League, Inc.

(800) 842-1242 • http://www.maleague.orgEditor- Charlotte C. Whatley, Director, Research and Compliance Information

The Compliance Connection is a free electronic publication sent to member credit unions. If you would like additional members of your credit union staff to receive this free publication, need to change your email address,

or wish to no longer receive this publication, please email complianceconnection@cucenter.org.

The Compliance Connection is intended to provide accurate and authoritativeinformation relative to the subject matter covered. Credit unions should contact their

attorneys or compliance professionals for legal and other professional assistance.

NCUA Withdraws UDAP Rule

In December 2008, the National Credit Union Administration (NCUA), the Federal Reserve Board and the Office of Thrift Supervision adopted a joint final rule that was intended to prohibit certain anti-consumer practices regarding credit card accounts,12 CFR Part 706. The provisions were set to take effect July 1, 2010.

However, most of the provisions of the unfair and deceptive practices rule (UDAP), such as limiting the ability of creditors to raise interest rates and charge late fees, were also addressed by Congress in the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act), which amends the Truth-in-Lending Act, and in the Federal Reserve Board’s amendments to Regulation Z to implement the CARD Act. In some cases, the UDAP rule conflicted with the CARD Act or the regulation.

In light of the CARD Act and the implementing Regulation Z provisions, the Federal Reserve has withdrawn its UDAP final rule to Regulation AA. The NCUA Board voted at their recent Board meeting to also withdraw its rule. The notice of the withdrawal of the rule will soon be published in the Federal Register. For administrative reasons the Register is requiring the effective date of the withdrawal to be reflected in the Register document as July 1 according to NCUA staff. However, the NCUA Board clarified that its examiners will not be checking for a credit union’s compliance preparations with the UDAP rule but instead will be instructed to consider a credit union’s compliance with the CARD Act (some provisions of the Act took effect August 20, 2009 while most of the provisions take effect February 22.) To read more of the results from NCUA’s recent board meeting, visit http://www.ncua.gov/GenInfo/BoardandAction/Reports/BAB10-0129.pdf. Additional information regarding the final rules to Regulation Z and the CARD Act are available later in this edition of the Compliance Connection.

NCUA Issues Regulatory Alert No. 10-RA-01Home Mortgage Disclosure Act

Data Collection Requirements for Calendar Year 2010

NCUA recently issued Regulatory Alert Number 10-RA-01 regarding the data collection requirements under the Home Mortgage Disclosure Act (HMDA) as implemented by Regulation C.

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Credit unions that engage in residential mortgage lending and meet certain criteria must comply with Regulation C. The regulation requires credit unions meeting all three of the following criteria to collect HMDA data associated with mortgage applications processed during 2010:

The credit union’s total assets as of December 31, 2009 exceeded $39 million. This is the 1. threshold established by the Board of Governors of the Federal Reserve Board (FRB);The credit union had a home or branch office in a metropolitan statistical area on December 2. 31, 2009; andDuring 2009, the credit union originated at least one home purchase loan or a refinance of a 3. home purchase loan secured by a first lien on a one-to-four-family dwelling.

Credit unions meeting all three of the above criteria must collect HMDA data during calendar year 2010 and submit the data to the FRB by no later than March 1, 2011. All other credit unions are exempt from filing HMDA data associated with mortgage applications processed during 2010.

To access the Federal Financial Institutions Examination Council’s (FFIEC) Internet site which provides a comprehensive discussion of HMDA and related reporting requirements visit http://www.ffiec.gov/hmda/default.htm. To obtain a copy of the Regulatory Alert, please access http://www.ncua.gov/news/express/xfiles/10-RA-01.pdf.

NCUA Issues Letter to Credit Unions No. 10-CU-01

Supervising Low Income Credit Unions and Community

Development Credit Unions

NCUA recently issued Letter to Credit Unions Number 10-CU-01 regarding supervisory guidance entitled, Supervising Low Income Credit Unions and Community Development Credit Unions. NCUA recently issued this guidance to all NCUA examiners. The primary focus of the guidance is to discuss the characteristics, benefits, and unique challenges of low income credit unions and community development credit unions. However, the contents of the Supervisory Letter are applicable to all credit unions in their continuing efforts to serve members of modest means.

This guidance was developed based on discussions with dedicated low income credit union management. To obtain a copy of the Letter, please access http://www.ncua.gov/letters/2010/CU/10-CU-01.pdf, and for its enclosure, please access http://www.ncua.gov/letters/2010/CU/10-CU-01%20Sup%20Letter.pdf.

NCUA Issues Letter to Federal Credit Union No. 10-FCU-01

Operating Fee Schedule for FY 2010

NCUA recently issued Letter to Federal Credit Unions Number 10-FCU-01 regarding the operating fee schedule for fiscal year 2010. NCUA advises federally chartered credit unions that in March 2010, federal credit unions will receive an invoice from NCUA for their 2010 operating fee and, if required, for the amount needed to adjust their National Credit Union Share Insurance Fund (NCUSIF) capitalization deposit to one percent of insured shares. The operating fee and the capitalization deposit adjustment will be based upon the assets and the insured shares, respectively, that were reported as of December 31, 2009. The combined payment will be due no later than Thursday, April 15, 2010.

For natural person federal credit unions, there are changes with the operating fee scale. The 2010 assessment rate has decreased by 1.58 percent from the 2009 rate. This change is primarily due to the growth of credit union assets. In addition, the asset level dividing points (rate bracket

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categories) will be increased by 8.50 percent. These amounts are adjusted each year by the same percentage as the projected federal credit union asset growth in order to preserve the relationship of the scale to the asset base. Additionally, as approved by the Board on June 18, 2009, assets on the books of natural person federal credit unions created by investments made under the Credit Union System Investment Program and Credit Union Homeowners Affordability Relief Program are excluded from determining the assessment. If applicable, invoices will include this adjustment.

For corporate credit unions, the same operating fee scale as the prior year will remain in effect. The scales are available with the Letter. To obtain a copy of the Letter, please access http://www.ncua.gov/letters/2010/FCU/10-FCU-01.pdf.

Agencies Issue Proposed Guidance for Reverse Mortgages

The Federal Financial Institutions Examination Council (FFIEC) has issued proposed guidance for reverse mortgages titled Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks (Guidance). NCUA, along with other federal financial institution regulators, is a member of the FFIEC and the guidance will apply to federally-insured credit unions.

After reviewing the comments received, the Guidance will be finalized and the Federal financial institution regulators will then issue it as supervisory guidance. State regulators will also be encouraged to issue similar guidance. The goal is to help ensure that a financial institution’s risk management and consumer protection practices adequately address the compliance and reputation risks associated with reverse mortgage loans.

Comments are due by February 16, 2010 and are due to CUNA by February 9, 2010. If commenting directly to the FFIEC, credit unions must include “FFIEC” as the agency name, reference “Docket Number FFIEC-2009-0001,” and title the comments as “Reverse Mortgage Comments.”

To obtain a copy of the proposed guidance, please access http://edocket.access.gpo.gov/2009/pdf/E9-29882.pdf.

Opinion Letters

The following is a summary of a recent NCUA opinion letter. The number in the parentheses after the subject is that given to the letter by NCUA and can be obtained using those numbers. Letters are available on the CUNA website (www.cuna.org), the NCUA website (www.ncua.gov) or by contacting the League office.

12/9/09 – Residential Mortgage Processing and Servicing as an Incidental Power (09-1021)

IssueWhether a federal credit union (FCU) can provide residential mortgage loan processing and

servicing to credit unions as a correspondent service under the incidental powers rule where the credit union receiving the service would fund the loan and the loan would close in the funding credit union’s name. 12 C.F.R. §721.3(b).

NCUA’s ResponseNCUA concludes this would be permissible as a correspondent service and notes, as required

for all incidental powers activities, FCUs must comply with any applicable NCUA regulations, policies, and legal opinions, as well as state and federal law applicable to the activity. 12 C.F.R. §721.5.

The inquiry concerns a large FCU that would like to enter into agreements with smaller state and federal credit unions to process and underwrite residential loans to members of those smaller credit unions. The loans would be in compliance with Freddie Mac and any applicable mortgage insurer guidelines. The smaller credit unions would fund the loans for their members, and the loans would close in the name of the smaller credit unions. The agreement would also provide that, upon

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a loan closing, the FCU would purchase the loan from the smaller credit union and sell it to Freddie Mac with the FCU retaining the servicing rights.

Under NCUA’s incidental powers rule, correspondent services are a preapproved incidental powers activity and include loan processing and loan servicing. 12 C.F.R. §721.3(b). Generally, correspondent services are those services that an FCU is authorized to perform for its members or as a part of its operation and that an FCU may provide to other credit unions. Activities preapproved under Part 721 must also comply with any applicable NCUA regulations, policies, and legal opinions, as well as, any applicable state and federal law. 12 C.F.R. §721.5. NCUA has previously issued a legal opinion concluding the use of correspondent service agreements to facilitate an FCU providing mortgage processing services to aid smaller credit unions is permissible. See Legal Op. 95-0805 (Aug. 9, 1995). Key to NCUA’s conclusion is the fact that, while the FCU will provide processing and servicing, the smaller credit unions will fund the loans and the loans will close in their names.

Regarding the FCU’s intention to purchase the loans from the smaller credit unions for sale in the secondary market, we note the eligible obligations rule generally regulates an FCU’s purchase of eligible obligations. 12 C.F.R. §701.23. This rule authorizes an FCU to purchase its members’ obligations from any source but also allows an FCU to purchase nonmember, real estate secured loans from any source if certain criteria are met. The FCU must be granting real estate secured loans on an ongoing basis and the purchase of the nonmember loans is undertaken to facilitate the packaging of loan pools for sale in the secondary mortgage market. Further, a pool must include a substantial portion of the FCU’s loans to its own members and must be sold promptly. 12 C.F.R. §701.23(b)(1)(iv).

NCUA Archives Member Business Lending Webinar

The NCUA Member Business Lending Webinar which was held in December has been archived on the NCUA website. The archive includes the actual webinar, PowerPoint presentation, transcript, and frequently answered questions (FAQs). To access the webinar and materials, visit http://www.ncua.gov/news/press_releases/2010/MR10-0106.htm.

Federal Reserve Issues Final Rules Regulation Z - the CARD Act

The Federal Reserve Board (Fed) has recently published a second set of final rules to implement certain provisions of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act), which prohibits and restricts a number of credit card practices. This new rule implements the provisions of the CARD Act that will become effective on February 22, 2010. These include provisions that restrict changes in interest rates, require minimum payment warnings on credit card statements, require co-signers for consumers who are under the age of 21 in order to open an account, and require that payments above the minimum amount be applied to balances with the highest interest rate, in addition to a number of other requirements.

The significant change between these final rules and the proposed version is that the official staff commentary now places significant new restrictions for credit unions that use variable rates with a fixed minimum rate, or “floor.” This rule also finalizes the earlier interim final rule that implements the CARD Act provisions that were effective as of August 20, 2009. This includes the requirement to send periodic statements at least 21 days before the payment is due and the requirement to provide a 45-day notice when the rate and certain terms of a credit card account are changed.

Most of the CARD Act provisions apply only to credit cards. However, early last year, the Fed issued comprehensive rules that amend the Regulation Z open-end credit rules, which encompass

FEDERAL DEVELOPMENTS

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credit card, as well as other open-end plans, and a number of those are also addressed in the CARD Act. In general, for these provisions, the Fed is not limiting their scope to credit cards if the earlier Regulation Z rules apply them to all open-end accounts, although there are exceptions to this general approach. These final rules incorporate the provisions of the earlier Regulation Z open-end credit rules. The mandatory compliance date for those earlier rules that are not addressed in the CARD Act rules will still be July 1, 2010, unless otherwise noted.

The provisions of the earlier Regulation Z rules that are not addressed in the CARD Act will remain in effect. The provisions of these rules that are inconsistent with the CARD Act provisions have been amended or withdrawn to ensure consistency. The applicable provisions of the unfair and deceptive acts and practices (UDAP) rules that were issued by the National Credit Union Administration (NCUA) early last year have been withdrawn, since they address similar issues.

In general, the provisions that apply only to credit cards will not apply to charge cards, home equity lines of credit (HELOCs) even if they are accessed by a credit card, and will not apply to overdraft lines of credit accessed by debit cards. These rules issued under the CARD Act will be effective as of February 22, 2010.

The Credit Union National Association (CUNA) has created an extensive final rule analysis which may be accessed at http://www.cuna.org/reg_advocacy/member/download/fed_012910.pdf. (Reminder: Compliance Connection readers are required to use a login ID and password to access member areas of CUNA’s website. Directions to obtain an ID and password are available at the end of this publication.) A copy of the final rule may be obtained at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100112a1.pdf.

Technical Notes: The Fed’s withdrawn final rule regarding open-end lending may be found at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100112a3.pdf. The Fed’s withdrawn final rule regarding Regulation AA may be found at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100112a2.pdf. NCUA has also withdrawn its final rule regarding Unfair and Deceptive Practices, 12 CFR Part 706, at its most recent Board meeting. Results of the Board meeting may be found at http://www.ncua.gov/GenInfo/BoardandAction/Reports/BAB10-0129.pdf. Credit unions with credit card programs that have more than 10,000 accounts and who are required to submit their credit card agreements directly to the Federal Reserve, may find the Technical Specifications Document at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100112a4.pdf which will identify the process and format for submission of the data.

CARD Act Restrictions for Variable Rate Credit Cards with Floors

The Federal Reserve Board (Fed) recently issued rules to implement most of the provisions of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act). Under certain of these provisions, which will be effective as of February 22, 2010, card issuers, such as credit unions, will only be able to raise their credit card rates under specific circumstances. One of these is when there is a variable rate and increases in the rate are based on a change in a publicly-available index that is not under the card issuer’s control.

These provisions generally follow the statutory requirements of the CARD Act. However, in the official staff commentary that was released in January with these rules, the Fed has indicated that the ability to raise rates under these circumstances will not apply if the issuer imposes a floor (a fixed minimum rate) that will not permit the rate to decrease below that level, even if there are reductions in the index that would otherwise result in lowering the rate. These provisions were not included in the proposed rule or proposed official staff commentary, which means not only did credit unions and others not have an opportunity to comment on these restrictions, but also those credit unions that use floors will now need to immediately assess their options, due to the rapidly approaching February 22, 2010 effective date of these final rule provisions and commentary.

In a typical example, a credit union may use the Prime Rate as an index and add a 2% margin. Since the Prime Rate is currently at 3.25%, this results in a rate of 5.25%. However, such a low rate does not adequately compensate for the cost and risks of the credit card so the credit union in this situation would generally choose to impose a floor that would be significantly higher than 5.25%, such as 9%.

In these situations, the Fed has indicated that after February 22, 2010, if issuers continue to apply the floor, the card issuer cannot apply increases in the variable rate to existing balances pursuant

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to Section 226.55(b)(2). This, in essence, will prohibit credit unions from offering a variable rate credit card account with a floor that does not permit the variable rate to decrease consistent with reductions in the index.

Shortly after the rules were issued, CUNA and League staff contacted the Fed to raise concerns with these new provisions. As a result, the Fed staff outlined the options available to credit unions in these situations, which are provided below under the following two categories:

Option 1 – Convert the variable rate to a fixed rate that will apply to existing balances and change the margin for future transactions

Under this option, it is necessary for credit unions to address the existing and new balances:

Existing Balances - Credit unions may convert the credit card’s existing outstanding balance to a fixed rate in which the floor for the current variable rate account becomes that fixed rate. The Fed’s attorneys indicated that no 45-day change-in-terms notice would be required prior to February 22, 2010, out of recognition that this change is required since the interest rate floor will conflict with the CARD Act requirements and due to the short period of time that credit unions have to comply with these requirements.

However, the Fed indicated that a change-in-terms notice with regard to this conversion to a fixed rate should be given within a “reasonable” time after February 22, 2010. It is not necessary to provide the notice of conversion separately. The term “reasonable” is not specifically defined, but one option would be to provide a notice of this change that would be sent with an upcoming periodic statement.

New Balances - As for new balances, the credit union would not have to apply a fixed rate but would have to make changes. One option is that the credit union could change the variable rate by increasing the margin so the index plus the margin equals the current floor. To increase the margin, a 45-day change-in-terms notice will be required. However, this does not necessarily have to be accomplished before February 22, 2010. This change can be delayed until closer to the time that the index increases to the point in which the floor will no longer apply.

The Fed staff indicated that perhaps the most efficient means to implement this option may be for the credit union to provide one notice that both informs the member that the existing balance will now be at a fixed rate that is equivalent to the current rate, or floor, and also informs the member that the margin is being increased for new transactions.

It should also be noted that under the CARD Act requirements, the existing balance subject to this fixed rate will be the balance that exists 14 days after the notice is sent. Therefore, the amount of the existing balance covered under this new fixed, permanent rate will likely increase to the extent that this notice is delayed, which could be detrimental to the credit union since they may no longer change this rate while this balance exists.

Option 2 – Keeping a variable rate for existing and new balances

Credit unions with a floor that exceeds the current index and margin that want to maintain a variable rate for both existing balances and new transactions must eliminate the floor. A credit union may remove or eliminate the floor without providing a change-in-terms notice to its members. Regulation Z Section 226.9(c)(2)(v)(A) states that no notice is required when the change involves a reduction in any component of the finance charge. However, the next time the variable rate adjusts, the rate would be based upon the current index and margin, which may not adequately compensate the credit union for the cost and risks of the credit card account. For the example described above, this means the rate will drop to 5.25%.

Although this may be unappealing, there may be reasons that a credit union would choose this option. For example, if the rate plus the margin is not too much below the floor, this will allow the credit union to keep their current variable rate without having to decrease it significantly. The credit union will then be able to increase it as soon as the index rises and apply the higher rate to the total balance. The credit union will have to weigh the financial risks involved with lowering the rate now in anticipation of general interest rates rising at some point in the future. Another advantage of this approach may be that credit unions would not have to track separate balances for existing and new transactions, at least in the short-term until other factors cause the credit union to create and track these balances.

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Situations when the floor is less than the index plus the margin

The above options primarily address situations in which the floor is currently higher than the index plus the margin. If the floor is below the index plus the margin, then the credit union may just simply remove the floor at this time. No specific notice to current accountholders would otherwise be required, primarily because this would be considered a favorable change for the consumers and, as stated above, Regulation Z does not require a change-in-terms notice in these situations. However, card issuers would need to change their account-opening disclosures and their application/solicitations to reflect this change, which may be accomplished by way of an insert that could be included with the current disclosures. In any event, until the floor is removed, the rate on existing balances may not be increased after February 22nd.

Federal Reserve and FTC Issue Final Risk-Based Pricing

Regulations under FACTA

The Federal Reserve Board (Fed) and the Federal Trade Commission (FTC) recently announced that they have jointly issued final rules to implement the risk-based pricing provisions in section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amends the Fair Credit Reporting Act (FCRA). The final rules generally require a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor. The final rules also provide for two alternative means by which creditors can determine when they are offering credit on material terms that are materially less favorable. The final rules also include certain exceptions to the general rule, including exceptions for creditors that provide a consumer with a disclosure of the consumer’s credit score in conjunction with additional information that provides context for the credit score disclosure.

To obtain a copy of the final rules, please access http://edocket.access.gpo.gov/2010/pdf/E9-30678.pdf.

Consolidation of Federal Reserve’s Check-Processing Operations

The Federal Reserve Board (Fed) has issued a final rule amending Appendix A of Regulation CC to restructure the Fed’s check-processing operations. Appendix A contains a routing number guide to assist financial institutions in identifying local and non-local checks for purposes of determining maximum hold periods. Generally, funds that are deposited by a local check must be available sooner than funds deposited by a non-local check.

Over the past several years, the Fed has been transferring check-processing operations from Reserve Banks around the country to the head office of the Reserve Bank of Cleveland. The amendments made by the final rule complete the Fed’s consolidation effort. Once effective, there will only be one single check-processing region for purposes of Regulation CC and all checks will be considered local.

Specifically, the rule amends Appendix A to transfer the check-processing operations of the Reserve Bank of Atlanta (Sixth District) to the head office of the Reserve Bank of Cleveland, located in the Fourth Federal Reserve District. Credit unions with branches in either of these districts will need to notify their members of the change. The amendments are effective as of February 27, 2010. To obtain a copy of the final rule, please access http://edocket.access.gpo.gov/2010/pdf/E9-31254.pdf.

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FTC Notice Regarding Charges Permitted Under the FCRA

The Fair Credit Reporting Act (FCRA), as amended in 1996, states that where a consumer reporting agency is permitted to charge a reasonable fee for making a disclosure to a consumer, the fee should not exceed $8.00. This fee became effective in 1997 and is required to be adjusted based on the Consumer Price Index (CPI), rounded to the nearest fifty cents. As a result of the latest CPI adjustment, the fee will be reduced from $11.00 to $10.50, effective as of January 1, 2010. This fee will not apply to consumers’ requests for a free annual credit report under the provisions of the Fair and Accurate Credit Transactions Act of 2003 (FACTA). It will apply to additional requests, unless the consumer is also entitled to receive them without charge. To obtain a copy of the notice, please access http://edocket.access.gpo.gov/2009/pdf/E9-30982.pdf.

Establishment of Term Deposits at Federal Reserve Banks

The Federal Reserve Board (Fed) has issued a proposed rule that would amend Regulation D, Reserve Requirements of Depository Institutions, to authorize the establishment of term deposits.

Term deposits would be similar to certificates of deposit and earn interest. The proposal would permit institutions that are eligible to receive earnings on balances held at Reserve Banks -”eligible institutions”- to hold term deposits.

An institution’s term deposits would be maintained in a Reserve Bank account separate from its master account and excess balance account. Term deposits could not be applied toward an institution’s required reserve balance or contractual clearing balance. In addition, the deposits would not be available to clear payments or to cover daylight or overnight overdrafts. However, term deposits could be used as collateral to borrow from the Fed’s discount window.

The Fed’s stated objective in proposing term deposits is to address inflation by encouraging more financial institutions to maintain balances at the Fed, rather than releasing the funds into the general circulation.

Comments were due to the Fed by February 1, 2010. To obtain a copy of the proposed rule, please access http://edocket.access.gpo.gov/2009/pdf/E9-31040.pdf.

Direct Debit of Federal Reserve Accounts for Treasury Check Reclamation

The Department of the Treasury’s Financial Management Service has issued a proposed rule to amend its regulation governing the endorsement and payment of checks drawn on the Treasury. Specifically, the rule would allow the Treasury to direct Federal Reserve Banks to debit a financial institution’s reserve account for all check reclamations that the institution has not protested.

Under the current regulation, Treasury sends a “Request for Refund (Reclamation)” to the financial institution that presented the check being reclaimed. If the debt is not paid within 120 days Treasury attempts to collect through administrative offset and then through Treasury Check Offset. If unsuccessful, Treasury discharges the debt and reports the amount to the IRS.

Treasury is proposing to amend Part 240 to provide that Treasury may direct Federal Reserve Banks to debit a financial institution’s reserve account for check reclamations which the institution did not protest. Treasury’s stated objective in issuing the proposed rule is to expedite and streamline the process of collecting unpaid reclamations.

Under the proposal, financial institutions would continue to have the ability to challenge the debit both before and after it occurs. The Federal Reserve Banks would be directed to debit an institution’s reserve account 30 days after the date the debt-notice was issued, absent protest by the institution during that timeframe.

If Treasury is unable to debit an institution’s reserve account, the current procedures for assessing fees and attempting to collect through offsets would continue to apply.

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As proposed, a financial institution’s endorsement or presentment of a Treasury check would effectively authorize its Federal Reserve Bank to debit its reserve account for any undisputed reclamation.

Comments are due to the Treasury by March 5, 2010. Please submit your comments to CUNA by February 18. To obtain copy of the proposed rule, please access http://edocket.access.gpo.gov/2010/pdf/E9-31166.pdf.

FinCEN Issues Ruling on CIP and Address Confidentiality Programs

The Financial Crimes Enforcement Network (FinCEN) has issued a ruling on customer identification (CIP) requirements as they relate to individuals who are issued a post office box address as part of their participation in a state address confidentiality program (ACP). To obtain a copy of the ruling (FIN-2009-R003), please access http://www.fincen.gov/statutes_regs/guidance/html/fin-2009-r003.html.

FinCEN Issues SAR Activity Review

Issue 13

FinCEN has issued SAR Activity Review - By the Numbers (Issue 13). By the Numbers is a compilation of numerical data gathered from Suspicious Activity Report (SAR) forms filed by depository institutions and other businesses regulated under the Bank Secrecy Act. By the Numbers serves as a companion piece to the SAR Activity Review - Trends, Tips & Issues which provides information about the preparation, use, and utility of SARs. By the Numbers is published twice a year, and covers two filing periods: January 1 to June 30, and July 1 to December 31. The numerical data from the filing periods is available on FinCEN’s website after the end of each period.

A review of the numerical data generated for Issue 13 reveals some interesting facts. In the first six months of 2009, the total volume of SARs within the Bank Secrecy Act (BSA) database increased 9%, compared to the corresponding six-month period in 2008. From January 1, 2009 to June 30, 2009, non-depository institution SARs increased 8%, compared to the corresponding six-month period in 2008. Non-depository institution SARs comprised roughly 43% of all reports filed, unchanged when compared to the corresponding six-month period in 2008.

To obtain a copy of this publication, please access http://www.fincen.gov/news_room/rp/files/sar_by_numb_13.pdf.

Financial Regulators Issue Interest Rate Risk Advisory

The Federal Financial Institutions Examination Council (FFIEC) recently released an advisory to remind financial institutions of supervisory expectations for sound practices to manage interest rate risk (IRR). This advisory, adopted by each of the financial regulators reiterates the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the IRR exposures of depository institutions. It also clarifies elements of existing guidance and describes some IRR management techniques used by effective risk managers. To obtain a copy of the complete press release and guidance, please access http://www.ncua.gov/news/press_releases/2010/JR10-0107.pdf.

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Fed Weighs In: When Do Loan Mods Equal Adverse Actions

Prompted by questions from consumer compliance examiners, the Federal Reserve issued a letter addressing whether adverse action notices under Equal Credit Opportunity rules are required for mortgage loan modification declinations, including those made under to the U.S. Department of Treasury’s Making Home Affordable Modification Program (HAMP).

Although credit unions have steadily been working with members on loan modifications—in fact, at a much accelerated rate compared to banks—few lenders are yet involved with the administration’s HAMP program. However, if the administration—through Freddie Mac and Fannie Mae—decides to move forward with ideas to tweak the program through such things as assistance with principal reductions, credit union use of the HAMP program may increase, as might that of other lenders.

The December letter, signed by the Fed’s Sandra Braunstein, director of the division of consumer and community affairs, states that the “equal credit” rule (Regulation B) “makes clear that such notice requirements are inapplicable to borrowers in default (Reg. B, § 202.(c)(2)(ii)).” However, the letter also notes “a major caveat in that regard.”

The letter outlines four questions to be answered to determine whether declining a HAMP or other loan modification constitutes a disclosure-triggering adverse action:

First, is there an extension of credit? •Second, is there an application? •Third, was the application for extension of credit declined? •Fourth, was the borrower currently delinquent or in default? •

The letter concludes: “Even if an adverse action notice is not required under Regulation B, borrowers may find it helpful to receive from institutions information regarding why their mortgage loan modification request was declined.

“For example, it is understoond that Treasury has directed HAMP servicers to provide written notice to a borrower that has been evaluated for HAMP but is not offered a trial period plan or modification, or is at risk of losing eligibility for HAMP because the borrower has failed to provide the required financial documentation.” To obtain a copy of the Letter, please access http://www.federalreserve.gov/boarddocs/caletters/2009/0913/caltr0913.htm.

Federal Reserve Updates Consumer Mortgage Guide

The Federal Reserve recently updated the Consumer’s Guide to Mortgage Settlement Costs. To access the Guide, visit http://www.federalreserve.gov/pubs/settlement/default.htm.

What the SAFE Act Means for Credit Unions

The “Secure and Fair Enforcement for Mortgage Licensing Act of 2008” (Title V of the Housing and Economic Recovery Act) was signed into law on July 30, 2008 (Public Law 110-289). The Act is commonly referred to as the SAFE Act and it reflects congressional intent to encourage uniformity among the states in terms of licensing and regulation for the residential mortgage industry. Among other provisions, the law encourages the states, acting through the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, to establish a nationwide mortgage licensing system and registry. All mortgage loan originators would be licensed through or registered with the system.

The SAFE Act required the federal banking agencies including the National Credit Union Administration (NCUA), collectively referred to as “the Agencies”, to develop a registration system to collect registration data from financial institution mortgage loan originators by July 29,

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2009. On May 29, 2009, the Agencies issued a joint notice of proposed rulemaking concerning implementation of the provisions of the SAFE Act. Under the proposal, the registration process will not have to be completed until 180 days after the Registry is capable of accepting registration data, which is not expected until some time later in 2010. The Agencies will issue a formal announcement in advance of the date when the Registry will begin accepting registrations.

In addition to the Agencies’ requirements, the SAFE Act also requires each state to implement a database to track their mortgage brokers and mortgage lenders. Last summer, Massachusetts finalized state laws to align itself with federal law. As of January, 2010, 43 states, the District of Columbia, and Puerto Rico have begun using the Nationwide Mortgage Licensing System and Registry (NMLSR) to manage their mortgage brokers, mortgage lenders, and loan originators exclusively through this comprehensive system.

Following are some commonly asked questions about the SAFE Act.

What must a credit union do to comply?At this time there is no action required of any mortgage loan originator who is an employee

of a federally insured depository institution, including state and federally chartered credit unions. Credit unions will be directed how to proceed after the Agencies promulgate a final rule.

What is the purpose of the SAFE Mortgage Licensing Act? The Act requires people who originate residential mortgage loans to be licensed or registered

with a state agency and to be assigned a permanent “unique identifier” to track employment and legal history.

Are credit unions included in the Act? Yes. The definition of a depository institution in the SAFE Act includes “any credit union.”

Federal banking agencies, including the NCUA, through the Federal Financial Institutions Examination Council (FFIEC), are tasked to develop and maintain the database system.

Do mortgage loan originators from credit unions need to be licensed or registered? Mortgage loan originators who are employees of a credit union will need to be registered.

How will the mortgage licensing and registration system be developed? The law calls for the federal banking agencies, including the NCUA through the FFIEC, to

develop and maintain a system for registering bank and credit union employees. The Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) launched the Nationwide Mortgage Licensing System and Registry (NMLSR) in 2008. Mortgage brokers, mortgage lenders and other individuals not supervised by a government agency are now required to complete a licensing process through the NMLSR. The NMLSR is likely to be used as a model for the national system required by the SAFE Act.

What information will a registered loan originator have to provide? An employee of a credit union who is a residential loan originator will provide:

Fingerprints for submission to the FBI and other agencies for a state and national criminal •history background check;Personal history and experience, including authorization for the System to obtain information •about any administrative, civil or criminal finding by any jurisdiction; andBe assigned a unique identifier that will facilitate electronic tracking and public access to his or •her employment history and enforcement action record.

What is the timeline for implementation?Each state must have in place by law or regulation a system for licensing and registering loan

originators by the end of a one-year period, or two-year period in the case of a state whose legislature meets only biennially, from the July 30, 2008 date of enactment of this title. Last summer, Massachusetts finalized state laws to align itself with federal law. The federal NMLSR likely will not be in place until later in 2010.

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Is there an available summary of the key provisions of the proposed implementing regulations?

Yes. The Credit Union National Association (CUNA) offers this summary:

Credit union employees involved in residential mortgage loan origination will have to submit •to the Registry: contact information, fingerprints for criminal background checks, financial service employment and financial history for the past 10 years, information related to administrative, civil, or criminal matters, and a certification that the information provided is correct, and authorization for the Registry to perform background checks.The credit union will be required to provide certain contact information to the Registry. In •addition, the financial institution must confirm to the Registry that it employs the registrant and notify the Registry of the date that he or she ceased being an employee.Residential mortgage loan originations include home equity loans, refinancings, reverse •mortgages, and other first and second lien loans that are used for personal, family, or household use.Employees who register will obtain a “unique identifier.” This identifier tracks the loan •originator throughout his career, regardless of employer, to facilitate public access to the person’s employment history and any disciplinary or enforcement actions that have been initiated against the loan originator. Each employee who registers must annually renew and update his or her registration (such as a change in employment or name).Certain of the employee’s registration information will be made publicly available so that •consumers can use the identifier number to check on the loan originator’s employment history and disciplinary record. Regulators will also have access to much of the information in the Registry.A “mortgage loan originator” means an individual who takes a residential mortgage loan •application and offers or negotiates the terms of a mortgage loan in exchange for compensation. This would not include an individual who performs purely administrative or clerical tasks on behalf of a loan originator or an individual who only performs real estate brokerage activities.The term “administrative or clerical” tasks means: The receipt, collection, and distribution •of information common for the processing or underwriting of a residential mortgage loan; and communication with a consumer to obtain information necessary for the processing or underwriting of the mortgage loan. The proposal includes an appendix that provides numerous examples of activities that would cause an employee to be considered a “mortgage loan originator” for purposes of these rules, which are not all inclusive.There is a de minimis exception for registration if a credit union handles only 25 or few •residential mortgages a year and an employee only originates 5 or fewer such loans a year – but once an employee is registered, he must maintain his registration.The credit union must adopt policies and procedures to ensure compliance with the registration •requirements, and cannot allow its employees to originate loans until registered (once the new registration system is in place). The proposal identifies a list of what must be included, including:

Informing identified employees of the requirement to register;o Requirements for how members can request an identifier number;o Procedures for confirming the adequacy and accuracy of the employee o registrations, including updates and renewals;Periodic independent testing for compliance;o Actions to be taken if the employee fails to comply; ando A process for reviewing the criminal background history reports on employees o that are received through the Registry and taking appropriate actions.

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Statement In Opposition to Assessment Formulas for Credit Unions

The Massachusetts Credit Union League recently testified in opposition to the pending proposed amendments (“proposed amendments”) found at 801 CMR 4.02 promulgated by the Executive Office of Administration and Finance (“A & F”) and the Massachusetts Division of Banks and Loan Agencies (“Division”) relative to changing the assessment formula for state-chartered banks and credit unions to fund the costs of supervision of such institutions by the Division as well as to institute an assessment formula for non-depository institutions if the revenues raised by the assessment formula for depository institutions does not meet the Division’s budgetary appropriation in a particular fiscal year.

The League recognized the delicate balance between regulatory authority and legislative directive exercised by A & F and the Division in proposing amendments to implement recent changes to Massachusetts General Laws C. 167, s. 2 found in Chapter 5 of the Acts of 2009. The League acknowledged the diligent review undertaken by A & F and the Division in promulgating changes to the assessment formula for state-chartered banks and credit unions to fund the costs of supervision by the Division as well as to institute an assessment formula for non-depository institutions if the revenues raised by the assessment formula for depository institutions do not meet the Division’s budgetary appropriation in a particular fiscal year.

At this time, the League remained opposed to any increases in assessments for overhead costs resulting from the implementation of the proposed amendments on the declining number of state chartered credit unions. While the state chartered credit union community remains strong, safe, sound, and federally-insured, the current economic climate, coupled with the impact on natural person credit unions of recent actions taken by the National Credit Union Administration to recapitalize and to stabilize the corporate credit union system, has had a significant adverse impact on the balance sheet of many credit unions. Additional state regulatory assessments will exacerbate this problem by further lowering earnings, possibly compromising the current stability of state chartered credit unions, and by having a chilling impact on the dual chartering system of regulation for credit unions.

The League also noted that the Division has been the revenue raising state agency to the Commonwealth’s General Fund for decades due to, in part, assessments imposed on credit unions. More recently, however, the Division’s funding for credit union activities and other staff and agency resources continues to decline despite the Division’s implementation of a variety of operating cost saving measures, including staff furloughs and reduced industry travel. It remained the position of the League that any assessments imposed on state chartered credit unions should remain as financial resources for the benefit of credit unions within the operating budget of the Division.

While the League remained opposed to any increase in assessments, the League also noted that the Division has committed to reduce the regulatory burden associated with reporting requirements imposed on credit unions in connection with the levy of such assessments. The Division has stated that it will change its practices and will no longer make a separate call on each credit union to file its asset size. The regular assessment will be based on assets included in the annual report ending December 31, 2009. As a result, if a special assessment is triggered, then there will be no separate call to report the assets of credit unions. The Division will use existing information then on file with the Division for such a determination. The League appreciated the efforts of the Division in streamlining this requirement to utilize existing regulatory information for calculation purposes thereby eliminating another regulatory reporting requirement on credit unions.

Launch of Consumer Access To Mortgage Lender Information

The Patrick-Murray Administration’s Office of Consumer Affairs and Business Regulation recently announced that the Nationwide Mortgage Licensing System & Registry, a mortgage

DIVISION OF BANKS

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licensing system operated by state financial regulators including the Massachusetts Division of Banks, is launching “NMLS Consumer Access.”

NMLS Consumer Access is a fully searchable website that allows the public to view information concerning state-licensed mortgage lenders, brokers and individuals currently licensed through NMLS. Future updates to NMLS Consumer Access will provide a record of applicable disciplinary actions taken against a licensee by any jurisdiction in the country.

The NMLS is a universal licensing portal designed to streamline the licensing process for both regulatory agencies and the mortgage industry by providing a centralized and standardized system for mortgage licensing. The NMLS initiative was begun by state mortgage regulators in 2004 in response to the increased volume and variety of residential mortgage originators and the need to address these changes with modern systems and authorities.

The Division has been at the forefront in the development of the NMLS. Commissioner Antonakes has served as a founding member of the NMLS oversight board for over three years, participating in weekly conference calls to supervise the implementation of the NMLS. In January 2008, the Division and six other state mortgage regulators became the first states in the country to manage their mortgage brokers, mortgage lenders and loan originators exclusively through the NMLS. Currently, 45 states and territories license mortgage companies, branches and individuals through the system. All 54 states and territories are expected to be participating in NMLS by the end of 2010.

In July 2010, the Federal Housing Finance Agency will mandate that Fannie Mae and Freddie Mac accept mortgage products only from mortgage companies who are registered through the NMLS. Accordingly, NMLS has created the ability to associate the loan documents and business practices with the individual and company that negotiated the transaction by registering every loan originator with a unique identifier and requiring that identifier to be incorporated with loan origination documents. Further, NMLS Consumer Access will be updated in the future to serve a central repository for enforcement actions against companies and individuals.

NMLS Consumer Access can be accessed at www.nmlsconsumeraccess.org.

Request for Parity Changes

The League continues to work with the Division of Banks and Loan Agencies to update the credit union parity regulations found at 209 C.M.R. 50.00 et. seq. In addition to new authorities, the regulations must be amended to delete various provisions negated by recent statutory updates to the mortgage and consumer loan provisions which eliminated various statutory classifications and provisions and vested authority in polices and procedures approved by boards of directors. At this time, an update request seeking new authorities will be forwarded to the Division by the end of February. Any suggestions for change are most welcome. Please forward suggestions to mclancy@cucenter.org.

Summary of Laws Enacted During the 2009 Session of the

Massachusetts General Court

S.A.F.E. Act1.

H. 4178

C. 44 of the Acts of 2009

Effective July 31, 2009

M.G.L.c.183

STATE DEVELOPMENTS

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Permits Massachusetts to retain oversight of mortgage loan originators and to maintain funding to provide grants to regional foreclosure centers throughout the Commonwealth. The state exemption from meeting loan originator licensing for state and federally-chartered credit unions is retained.

Ethics, Lobbying and Campaign Financing2.

H. 4133

C. 28 of the Acts of 2009

Effective January 1, 2010

M.G.L.c.66

Enhances the integrity of the political process and helps to restore public trust by banning gifts to public officials, and increasing the authority of the Ethics Commission to investigate and prosecute alleged ethics violations. Public officials are prohibited from knowingly receiving gifts intended to influence their actions. The legislation bans all gifts to public officials, imposing a hefty civil violation for gifts up to $1,000 and makes it a felony for anything with value greater than $1,000. The felony charge for gifts greater than $1,000 carries a penalty of 5 years in prison, a $10,000 fine, or both, and applies to both the recipient of the gift and the giver.

With respect to ethics, the new law increases penalties for bribery convictions to up to 10 years imprisonment, $100,000 fine, or both. It also increases penalties for violations of gifts/gratuities statute to up to 5 years imprisonment, $25,000 fine, or both. Obstruction of justice is codified as a crime and increases penalties (up to $10,000 and 5 years in prison or 2 ½ years in a house of correction in civil cases; and up to $25,000 and 10 years in prison or 2 ½ years in a house of correction in criminal cases). Finally, the new law allows the Attorney General to convene a statewide grand jury.

The law also targets reform of our campaign finance system, eliminating all “special committee” arrangements between a state political party and an elected official, allowing only individual contributions up to $5,000 to a political party.

Under the new law, legislative candidates and political action committees will file mid-year disclosure reports in odd-numbered years. The extra report provides added disclosure in non-election years. Currently, candidates only file a year-end report in odd-numbered years. Fines for filing late campaign finance reports will increase from $10 daily to $25 daily, with a $5,000 maximum. Candidates will publicly disclose how consultants and other vendors spend their campaign money (subject to certain dollar limits). Finally, the new law authorizes the Director of the Office of Campaign and Political Finance to refer local matters to the Attorney General.

Other new changes relate to the definition of lobbying and additional disclosures. A new lobbyist classification redefines and clarifies lobbying activities and captures actions that seek to wrongly influence official government activity. The definition of lobbyist is expanded to include those who “plan” or “strategize” to influence legislation and policy on Beacon Hill. This requirement applies to individuals who spend more than 25 hours per 6 months and earn at least $2,500 for this advocacy to register as lobbyists. The new law doubles the penalty for violating lobbying laws to $10,000. Limited subpoena power is granted to the Secretary of State to enforce lobbying laws and to suspend or revoke lobbyist licenses if cause is shown.

Late filing penalties are increased to $50 per day for first 20 days and $100 per day thereafter. Criminal penalties are increased for registration violations to up to 5 years imprisonment, $10,000 fine, or both. The new law mandates the suspension of license for 10 years from date of conviction for those convicted of a felony. Lobbyist training requirements are increased. Finally, the Attorney General is granted civil enforcement authority for violations of lobbying laws.

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State Legislative Update

The League recently provided testimony to the Joint Committee on Financial Services in support of the following proposals:

STATEMENT IN SUPPORT OF HOUSE 922

AN ACT RELATIVE TO PUBLIC FUNDS

Public funds are public monies deposited into a financial institution by the treasurer of any state or local governmental unit, or any agency of such unit. The thrust of House 922 is to allow public officials to deposit funds in a wider selection of depositories, such as state or federal credit unions, that are locally-owned and that make local investments. As a result, House 922 amends state credit union law to permit credit unions to accept such funds in Section 1 of the bill. Sections 2, 3 and 4 are companion sections which relate to amending relevant provisions to permit public officials to deposit funds into a state or federal credit union.

The League believes that the important public policy purpose of House 922 is to provide for an open marketplace where public agencies will be able to secure the most advantageous depository arrangements for the public’s dollars. Increased competition for public fund deposits will produce better rates of return for public dollars. The League also notes that House 922 would provide a safe investment alternative for public funds. Massachusetts state and federal credit unions, which are the subject of House 922, are safe and sound, federally-insured financial institutions.

As cooperative financial institutions, Massachusetts credit unions serve the consumers of this state very well. House 922 is a simple request that gives public entities a choice in determining where their dollars could secure the best possible return. House 922 does not mandate such entities to deposit funds into credit unions. It broadens the current law to permit deposits of public funds in credit unions only if a public official believes it is appropriate to do so. Under these conditions, credit unions will be subject to the same rules and restrictions regarding public funds as other financial service providers. House 922 provides a more open marketplace in which a public entity can make the best decisions for their organization.

In our current tight fiscal cycle, the League also suggests that adding state and federal credit unions as local depository options for public funds is most beneficial to local communities. With close ties to their communities, Massachusetts credit unions continually receive requests from public officials seeking to solicit them as depository alternatives. Examples of local municipal support for credit unions as a depository alternative are were attached to the testimony. The League suggests that increased options for such deposits results in competitive pricing for such products.

Moreover, credit union deposits reside in locally-owned and governed cooperatives that are headquartered in and make loans in the communities in which they operate. In contrast, 50% of Massachusetts bank deposits are in banks headquartered outside Massachusetts including national and international banks and banking companies. In addition, the application of Community Reinvestment Act (“CRA”) provisions to credit unions also serves as an important check and balance in this area to ensure that the credit needs of local communities are met. See M.G.L. C.167, s.14 (community reinvestment act). Furthermore, those credit unions possessing “Outstanding” ratings under CRA are eligible for recognition under State Treasurer Cahill’s financial institution outreach program, but are unable to accept the $100,000 deposit of state funds which accompanies such recognition and is the basis of such outreach program focusing on local investment options.

The League further suggests that appropriate safeguards exist in the bill and that credit union deposit-taking authority under House 922 is not unlimited. Credit unions are safe and sound depository alternatives subject to a series of statutory deposit limitations. Amongst the many current controls which exist on the maximum amount credit unions can accept for such deposits, first and foremost, are our strong capital requirements. All Massachusetts credit unions must maintain a net worth ratio (capital divided by assets) at least seven percent (7%) in order to be considered “well-capitalized” under federal regulations. 12 C.F.R. 702.102(a)(1) (prompt corrective action net worth categories). Similarly, the Massachusetts Division of Banks and Loan Agencies also has minimum

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capital standards for credit unions. Reg. Bull. 4.2-102 (minimum capital regulatory standards). These capital requirements limit our ability to accept massive new deposits.

Another important control is found in our statutory and regulatory limits on shares and deposits. Federal regulations limit the total amount of public funds a credit union can accept to twenty percent (20%) of total deposits. 12 C.F.R. 701.32 (payment on shares by public units). Massachusetts state chartered credit unions are the only credit unions in the country subject to a specific statutory deposit cap. M.G.L. C.171, s.30 (limitations on shares and deposits). Such deposit limitations include an individual and aggregate cap. Id. Furthermore, as a practical matter, many credit unions would only accept public funds up to the amount covered by deposit insurance. Nevertheless, permitting public fund deposits in credit unions will offer public officials greater choice and opportunity to place funds in locally-owned and controlled institutions, increasing competition for those funds, which in turn should increase the return to the public on those funds.

The League notes that the legislative concept of credit unions accepting public funds is not new. Over 20 state legislatures across the country have enacted legislation to allow local credit unions to become public depositories. In New England, the states of Maine and Rhode Island all allow credit unions as alternative deposit choices for public funds. 9-B M.R.S.A. Section 827(2); R.I.G.L. 35-10.1-2(2), respectively. In addition, federal credit unions possess the authority under their governing law to accept such funds subject to a regulatory plan. 12 U.S.C. s.1752 (definition of government unit); 12 C.F.R. 701.32 (payment on shares by public unit); 12 U.S.C. 1757(6) (powers). In addition, there are two legislative proposals related to House 922 pending before this Committee during the current session. Senate 513 is a resolve which seeks to establish a special commission relative to public deposits. Under this bill, credit unions would have representation on such a special commission. The inclusion of credit unions is reflective of the desire by city and town clerks, the sponsors of the proposal, to include credit unions as financial institutions located in their communities and with whom they are familiar with, as additional options for their depository choices. The other proposal is Senate 520 which seeks similar authority for the Massachusetts State Employees Credit Union. Finally, this option is important in light of a municipal treasurer survey compiled by the Massachusetts Inspector General (“Inspector”). The Inspector noted that “while municipalities have remained loyal bank customers, it is questionable whether they have been receiving the best value in return.” See Banking Services Procurement Guide for Local Government Treasurers, page 11, December 2004.

Credit unions are unique amongst depository Massachusetts institutions. Opponents to House 922 may suggest to this Committee that credit unions operate like banks and that only income tax-paying entities should be permitted to accept public funds. The League welcomes this discussion. Massachusetts banks and credit unions do not and cannot operate the same due to structural, operational and powers differences. Attached to the testimony was a brief comparison of such authorities.

With respect to the income tax issue, the League reminds this Committee that Massachusetts credit unions are amongst the most responsible corporate taxpaying entities in the Commonwealth. Credit unions pay all of the same taxes as any other Massachusetts business: property, sales, conveyancing, employer, rooms and meals, payroll and various others.

As not-for-profit cooperatives, our members are consumers paying income taxes on dividends paid to them. In Massachusetts last year, credit union members paid taxes on dividends earned totaling in excess of $553 million. No one can acquire wealth tax-free by belonging to a credit union. Furthermore, much of the tax dollars that local municipalities receive are derived from property taxes. Since credit unions pay their fair share of property taxes in the Commonwealth, the tax arguments proposed in opposition to House 922 are not based upon merit, but rather upon competitive grounds, and should not be a barrier to the freedom of choice inherent in House 922.

STATEMENT IN SUPPORT OF HOUSE 1009

AN ACT RELATIVE TO CREDIT UNION BRANCHING

The thrust of House 1009 is to authorize New England regional interstate banking and branching for Massachusetts credit unions. Currently, Massachusetts state-chartered credit unions are limited to the establishment of branch offices within the same county as their main office or within 50 miles of their main office into another county. M.G.L. C.171, s. 8. To accomplish the goal of

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House 1009 within our current statutory framework, Sections 1 and 2 of the bill address two (2) major areas of state-chartered credit union branching activities: statewide branching and regional interstate branching within New England.

Section 2 of the bill also addresses examination, CRA/consumer protection compliance, cooperative agreements with credit union regulators, regulatory enforcement actions and access to records applicable to out-of-state credit union branches located in Massachusetts. Section 3 of the bill makes a parallel change within another relevant section of credit union law governing transactions which trigger the geographical restrictions for state-chartered credit unions. See M.G.L. C.171, s.79 (merger of credit union in possession of excess insurer).

A. Current Branching Authority

The current statute containing the geographical restrictions on branch offices was first enacted in 1965 to authorize branching within county boundaries. 1965 Mass. Acts 321. This limit was subsequently expanded to fifteen (15) miles from a main office location outside of a county in 1977, to twenty-five (25) miles in 1979 and most recently to fifty (50) miles in 2004. 1977 Mass. Acts 143; 1979 Mass. Acts 293(4); 2004 Mass. Acts 461. Attached to the testimony were copies of these provisions. It is the position of the League that the current statutory provisions governing branch offices for credit unions are outdated and serve no compelling purpose within today’s rapidly changing and highly mobile consumer marketplace.

Section 1 of House 1009 strikes the current mileage restriction on the locations of branch offices. In addition to being outdated, the geographical limits are unable to be applied to out-of-state credit unions that establish branches in the Commonwealth as proposed by House 1009. As a result, a statewide, reasonable necessity and public benefit standard for statewide branching is proposed in the bill.

B. Regional Interstate Branching

Section 2 of House 1009 provides for regional interstate banking and branching. It allows any foreign credit union or out-of-state federal credit union with its principal place of business in one of the states of Connecticut, Maine, New Hampshire, Rhode Island or Vermont, to establish and maintain branch offices or depots in the Commonwealth, provided that the laws of that state expressly authorize Massachusetts credit unions to establish and maintain branches and depots in such state. It also requires the foreign or out-of state credit unions to operate in accordance with the same laws which govern Massachusetts credit unions, including CRA requirements, and provides for cooperative agreements between credit union regulators to facilitate regulatory supervision of such branches. A model cooperative Interstate Branching Agreement (“Agreement”) has been developed by the National Association of State Credit Unions Supervisors (“NASCUS”) to assist state regulators in examining credit unions under such laws. The Massachusetts Division of Banks and Loan Agencies is a member of NASCUS and has endorsed the Agreement. A copy of the sample Agreement was attached to the testimony.

The League notes that cross-border credit union branching is not a new concept to the Commonwealth or to this Legislature. Federally-chartered credit unions may establish and maintain branches anywhere within the United States without advance regulatory approval or notice. 12 U.S.C. s. 1752(9). Massachusetts state-chartered credit unions can currently establish electronic branches, commonly referred to as ATMs, without regard to mileage restrictions. M.G.L. C.167B, s.3. Shared branching, a cooperative venture used exclusively by credit unions, also permits credit unions to share branches with their state or federal counterparts in a network. 209 C.M.R. 50.06 (shared branch application); 209 C.M.R. 50.08 (3)(b) (expedited shared branch approval). The credit union shared branching network currently has approximately 62 locations in Massachusetts and 6,200 outlets across the United States. At present, there are six (6) state chartered credit unions and nine (9) federally chartered credit unions participating in shared branches. Furthermore, regional interstate banking and branching was previously recognized by the Massachusetts Legislature in 1982. 1982 Mass. Acts 626. The League suggests that House 1009 is a reasonable extension and update of current credit union branch authority in Massachusetts.

While many credit union members access services through technology options, such as internet banking, such remote methods of service are exactly that – remote. They provide limited services to the credit union’s current membership and are challenged to attract new members from within

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the credit union’s existing field-of-membership. The inability of the first and only Massachusetts internet bank, Lighthouse Bank, to succeed underscores the importance and need for branching opportunities. Consumers, including those in Massachusetts, still prefer to transact business, particularly lending business, in-person.

The regional interstate branching provisions set forth in House 1009 are also necessitated by the changing credit union branching climate surrounding the Commonwealth. At present, Massachusetts remains the only New England state without credit union regional interstate branching authority. Since 1983, Maine has possessed a credit union interstate branching provision requiring reciprocity by the out-of-state credit union laws. 9-B M.R.S.A. Section 816. Connecticut and Rhode Island have also adopted similar provisions as well. C.G.S. §36a-462b; R.I.G.L. 19-5-27, respectively. The State of Vermont also adopted a similar provision which became effective on July 1, 2005. 2VSA Part 6, Chapter 223. The State of New Hampshire also recently adopted a similar provision. Adm. Ban. 510.09. Attached to the testimony were the relevant New England state credit union branching provisions and a request from the Vermont Credit Union League seeking such reciprocal interstate branching authority in Massachusetts. Furthermore, 32 other states, from amongst those who possess a state credit union act, across the United States currently authorize either regional or nationwide branching for credit unions.

This bill is not an example of state-chartered credit unions’ overreaching, but rather a way for state-chartered credit unions to reach members who qualify for membership and choose to live or work across our borders in an adjoining state. Changing financial institutions is irritating and time-consuming for consumers. Limited member choice to inconvenient branch offices because of an outdated geographical requirement is a disservice to the working families of Massachusetts.

The League also suggests that an expansion of credit union branching authority will not automatically trigger common bond expansions for state-chartered credit unions. The establishment of any branch under House 1009 must be measured against a reasonable necessity and public convenience standard. Advance regulatory approval is still required for out-of-state credit unions and those Massachusetts credit unions not meeting the requirements of Regulatory Bulletin 2.1-101 under House 1009. Those Massachusetts state-charted credit unions meeting the regulatory branch notice requirement may still have their branch denied by the Commissioner of Banks within the notice period. In all cases, an appropriate regulatory check and balance exists and branch approvals may only be granted if it is reasonable necessary to furnish financial services to credit union members that belong to the credit union and if public convenience is served as determined by the Commissioner of Banks.

Despite technological advances, consumers still prefer the option to conduct financial transactions in-person. A study by a nationally-recognized industry consultant found that 90% of a regional financial institution’s new customers were acquired at the branch. Booz Allen Hamilton, The Rebirth of the Forgotten Branch, 2003. The study also found that 715 of basic transactions were performed at a branch, even though telephone and internet service were available. Forty-nine percent (49%) of consumers preferred applying for a home loan or personal loan at the branch and 45% went to the branch for a credit card. Finally, the study showed that customers who formed a relationship with their local branches are likely to stay almost two times longer than a comparable customer. In order for state-chartered credit unions to fully serve their members and better penetrate their current fields-of-membership, the League believes that credit unions must be able to establish full-service branches wherever their membership is located, whether within the Commonwealth or within the New England region.

The League also believes that increased competition among financial service providers serves to benefit all consumers, regardless of whether they are credit union members. Lower loan rates, lower or non-existing service fees and improved customer service are all a result of competition. For example, annual estimates on amounts saved by all consumers by using a credit union instead of conducting all financial transactions at other providers total $9.2 billion. In Massachusetts, total estimated direct financial benefits of credit union membership aggregate over $198 million which is approximately $81.00 per member or $154.00 per member household.

The League urges this Committee to consider adopting regional interstate banking for credit unions in light of the convenient delivery of financial services it brings to Massachusetts credit union members. The changing branching environment for credit unions on our borders places Massachusetts state-chartered credit unions at a significant disadvantage without a corresponding change to our state branching provisions. In addition, this authority will serve to complement similar, existing authority for electronic and shared branching, as well as the branch authorities exercised by Massachusetts federal credit unions.

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Internal Revenue Service 990 Update

The Internal Revenue Service recently reminded tax-exempt organizations to make sure they file their annual information form on time. The guidance is targeted to charitable non-profits but the essence is the same for credit unions. In 2010 the tax-exempt status of any non-profit that has not filed the required form in the last three years will be revoked.

The Pension Protection Act of 2006 requires that non-profit organizations that do not file a required information form for three consecutive years automatically lose their Federal tax-exempt status. This requirement has been in effect since the beginning of 2007.

A list of revoked organizations will be available to the public, as well as state charity and tax officials on the IRS website. If an organization loses its exemption, then it will have to reapply with the IRS to regain its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.

Small non-profit organizations with annual receipts of $25,000 or less can file an electronic notice, Form 990-N (e-Postcard). They will need only a few basic pieces of information to file: the organization’s employer identification number, its tax year, legal name and mailing address, any other names used, an Internet address if one exists, the name and address of a principal officer and a statement confirming the organization’s annual gross receipts are normally $25,000 or less.

Tax-exempt organizations with annual receipts above $25,000 are required to file the Form 990 or the Form 990-EZ annually. Private foundations file Form 990-PF. Churches and integrated auxiliaries of churches are not required to file Form 990-series returns or notices. Form 990-series returns and e-Postcards, are due by the 15th day of the 5th month, May 15, after an organization’s tax year ends.

Q. True or false: Credit unions without formal overdraft protection programs do not have to worry about obtaining a member’s opt-in before charging NSF or overdraft fees when they decline or pay an ATM or point-of-sale (POS) debit card overdraft.

A. False: even institutions without formal overdraft programs will find themselves covered by the Regulation E rule if they charge fees for paying (or declining) ATM and one-time debit card overdrafts. The Regulation E overdraft rule’s effective date is July 1, 2010 (August 15, 2010 for existing accounts).

The Federal Reserve Board has made it clear that credit unions will not be able to charge a fee for paying (or declining to pay) an ATM or one-time debit card overdraft unless the member receives proper written notice, and opts-in to the institution’s overdraft service. This fee prohibition also applies in cases where the credit union doesn’t have a formal overdraft program but pays an authorized ATM/debit card transaction that overdraws a member’s account. The credit union still cannot charge a fee without an opt-in, but may deduct the amount overdrawn from the member’s account.

Further, without a member’s opt-in, the credit union cannot charge a fee for declining to pay an ATM/debit card transaction. According to Federal Reserve Board staff, consumers who have chosen not to opt-in have an expectation that transactions will be declined and that they will not be charged fees.

Credit unions have raised a number of operational concerns, especially with regard to network rules requiring the payment of authorized debits. CUNA has spoken to the Fed numerous times about this problem, and has been told that the financial services industry must figure out a way to deal with these issues. Therefore, CUNA is now in the process of reaching out to industry experts and payment networks to figure out what options are available to credit unions. However, we will continue discussing credit unions’ concerns with the Fed as part of this process.

CUNA’S Q&A CHALLENGE

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Q. Does the new Regulation E overdraft rule allow the credit union to charge a negative balance fee when the member’s ATM/debit card overdraft leads to a negative balance for a long period of time?

A. Under the new Regulation E rule, it does not matter whether you call the fee an “overdraft fee” or a “negative balance fee” - if the fee results from an ATM/one-time debit card overdraft, it’s covered by the regulation, So, come July 1st (August 15th for existing members), the credit union will only be permitted to charge these types of fees for ATM and one-time debit card overdrafts if the member is provided the proper written notice, and opts-in to the service. The notice to the member must disclose all applicable overdraft fees, including per item fees, daily overdraft fees, and sustained overdraft fees, where fees are assessed when the member has not repaid the amount of the overdraft after some period of time.

Q. Does the credit union have to provide an adverse action notice when it declines a member’s request for a loan modification under the Treasury Department’s Making Home Affordable Modification Program (HAMP)?

A. The best answer is: it depends. The Federal Reserve Board recently issued Consumer Affairs Letter (CA 09-13) to address whether Regulation B adverse action notices were required for mortgage loan modification declinations, including those made under HAMP. Regulation B requires an adverse action notice when a creditor declines an application for an extension of credit from a borrower that is not currently delinquent or in default on that loan.

The Fed’s letter outlined four questions institutions should answer to determine whether declining a HAMP or other loan modification constitutes an adverse action under Regulation B: 1) is there an extension of credit; 2) is there an application; 3) was the application for extension of credit declined; and 4) was the borrower currently delinquent or in default?

Even if the adverse action notice is not required under Regulation B, the letter explains that borrowers may still find it helpful to receive information regarding why their mortgage loan modification request was declined.

Q. Jessica, a member with DEF FCU, just received the Good Faith Estimate (GFE) for her mortgage loan in the mail. She noticed that the GFE does not list address of the property to be purchased. She contacted her credit union to notify them about the error. Would adding the missing address constitute the type of “changed circumstances” that would require the credit union to issue a revised GFE? Yes or No.

A. No. There are six pieces of information that the credit union should receive during the application process: the borrower’s name, borrower’s monthly income, borrower’s social security number, property address, estimated value of the property and the mortgage loan amount requested. Normally, these pieces of information are collected by the credit union before the GFE is issued. However, in this instance, the RESPA FAQs note that the later identification of a missing property address would not be considered a “changed circumstance” to justify the need to issue a revised GFE.

It should be noted that the FAQs distinguish this situation from a situation where an incorrect property address was provided on the initial GFE. Under those facts, the corrected address would be considered a “changed circumstance” that would require issuance of a revised GFE.

Q. Mandy, a mortgage representative at ABC FCU, is preparing a member’s Good Faith Estimate (GFE). ABC FCU does not allow its members to shop for settlement services. However, Mandy has been told that even though borrowers are not allowed to shop for settlement service providers, she is still required to provide the “written list of providers” to ABC FCU’s members? Is this correct? Yes or No.

A. No. Generally, the Real Estate Settlement Procedures Act (RESPA) requires credit unions to provide a written list of providers, along with the GFE, to borrowers if those borrowers are permitted to shop for settlement services providers.

In instances where a lender, such as ABC FCU, does not give borrowers this flexibility to shop for settlement service providers, no written list is necessary. The credit union would complete item

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#3 on page 2 of the GFE with all third party settlement services (except title services) that the credit union requires and select the provider of those services. Examples of these services include (but are not limited to) appraisal services, credit reports, tax services, flood certifications and up-front mortgage insurance premiums.

Q. Joshua, mortgage representative for LMN FCU, is completing a member’s GFE and he is confused. There are a number of items that are to be paid outside of closing in relation to this member’s loan and he is not sure if these amounts should be documented on the GFE. Should they? Yes or No.

A. No. According to the RESPA FAQs, the new GFE form does not provide a place to document “paid outside of closing” or “P.O.C.” items. HUD notes that it did not provide the ability to document these charges on the GFE because “such information would not help borrowers shop for loans or facilitate charge comparisons between the GFE and HUD-1.” The amounts provided on page 2 of the GFE will include the charges for settlement services normally required to be reflected on the GFE. However, charges paid outside of settlement by the borrower, seller, loan originator, real estate agent, or any other person must be included on the HUD-1 and marked “P.O.C” and these amounts are not to be included in the computing totals. Also, the settlement agent must indicate the party paying for the charges such as “P.O.C. (borrower)” or “P.O.C. (seller)” on the settlement statement.

Resource Links:CUNA’s Compliance Challenge available at•http://www.cuna.org/compliance/member/comp_challenge/01_10_challenge.html CUNA’s eGuide to Federal Laws and Regulations available at •http://www.cuna.org/compliance/member/eguide/eguide.htmlCUNA’s “What’s New In Compliance”•http://www.cuna.org/compliance/member/eguide/index_archive10.html Massachusetts Compliance InfoSight •http://ma.leagueinfosight.com/InfoSight_Home_214.html

Compliance Connection readers must have a login ID and password to access CUNA’s Compliance Resources. League affiliated credit unions are entitled access to all “Member Areas” of CUNA’s website. To obtain a login ID and password, please complete the “CUNA ebusiness Form” available at https://ebus.cuna.org/CUNACustomizations/CUNARegistration/tabid/156/portalid/0/Default.aspx

Massachusetts Compliance InfoSight is password protected. Compliance Connection readers who are not already registered for Compliance InfoSight will have an opportunity to register after clicking on the link provided above.

Please note that Compliance Challenge is intended to provide CUNA and League affiliated credit unions with useful compliance information. CUNA and the League are not engaged in rendering legal, tax or other professional advice in presenting this information. If legal advice or other expert assistance is required, the services of an appropriate professional should be obtained.

The February edition of Compliance Connection includes a new feature. Compliance Connection readers may now find a rolling list of upcoming regulatory effective dates. For further details about any of the effective dates listed, visit our online compliance resource, Compliance InfoSight, at the following link:

http://ma.leagueinfosight.com/Compliance_Calendar_16374.html

COMPLIANCE CALENDAR

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February, 2010

February 14th, 2010: Regulation Z - Disclosures for Private Student Loans as required by • The Higher Education Opportunity Act (HEOA) – Effective Date.February 22, 2010: Regulation Z – CARD Act – Effective Date.•February 27th, 2010: Regulation CC – Revisions to Appendix A – Effective Date. All deposited •checks are considered local checks under Appendix A for funds availability purposes. Credit unions must review, update, and notify members of changes to their Funds Availability Disclosures.

March, 2010

March 1st, 2010: HMDA Reports Due.•March 1st, 2010: Information Security Regulations in Massachusetts - 201 CMR 17.00 – •Effective Date.March 19th, 2010: ACH - Authorizations and Returns rule change - Effective Date. ACH Stop •Payments rule change to align ACH - NACHA Rules with Regulation E - Effective Date.

April, 2010

April 1st, 2010: Regulation Z - Escrow Requirement for “Higher Priced” Mortgages - Effective •Date.

June, 2010

June 1st, 2010: Regulation GG - Internet Gambling Funding Prohibition – Effective Date. •June 18th, 2010: ACH - Risk Management and Assessment Rule Change - Effective Date. •June 18th, 2010: ACH - Direct Access Registration Rule - Effective Date. •

July, 2010

July 1st, 2010: Regulation E – Final Rule for Overdraft Protection Plans - Effective Date. •(August 15 for existing accounts.)July 1st, 2010: FACT Act - Rules and Guidelines on the Accuracy of Credit Information - •Effective Date. July 1st, 2010: Regulation Z – Final Rule for open-end lending – Effective Date.•

August, 2010

August 22, 2010: Regulation Z – Final Provisions of the CARD Act – Effective Date.•

October, 2010

October 1st, 2010: Regulation Z - Escrow Requirement for “Higher Priced Manufactured •Housing” Mortgages - Effective Date.

December, 2010

December 31st, 2010: Model Privacy Notices - Effective Date.•

January, 2011

January 1st, 2011: FACT Act – Risk Based Pricing Notices – Effective Date.•