Thursday, October 31, 2013

Maryland Regulator Approves CU Purchase of Bank

Mark Kaufman, Maryland Commissioner of Financial Regulation, today announced his approval for the purchase and assumption of the assets and liabilities of Advance Bank by Municipal Employees Credit Union (MECU) of Baltimore.

Advance Bank, a federally-chartered mutual savings bank located in Baltimore, Maryland, has two branches and total assets of approximately $54 million.

Credit Union Times is reporting that more than two-thirds of Advance’s customers either live or work in the city of Baltimore, making them automatically eligible for MECU membership. The credit union plans to pay the $5 membership fee for Advance members to become MECU members.

However, for the one-third of Advance’s customers who don’t already qualify to join the cooperative, the credit union stated that it will pay their $5 fee for them to become members of the American Consumer Council, which would make them automatically eligible to become MECU members.

Read the press release.

Lawsuit Alleges Retaliation by San Diego County CU

A former senior executive, Scott Norris, at San Diego County Credit Union (SDCCU) is claiming in a wrongful termination lawsuit that the institution failed to correct problems in its loan-servicing program that affected thousands of customers.

The lawsuit claims that the the credit union engaged in unlawful, and fraudulent, activities. SDCCU had failed to
disclose changes in fees on mortgages required by the Truth in Lending Act ("TILA") and Mortgage Disclosure Improvement Act ("MDIA").

SDCCU had problems with widespread errors with regard to real estate loan servicing. Specifically, the credit union had been improperly processing late charges. The problem dated back to 2005 and approximately 2,000 members of SDCCU was affected by the error, according to the complaint.

Also, the complaint alleges that the plantiff recommended that recast the affected loans, and estimates that the cost to credit union could be approximately $500,000 due to needing to issue refunds to members. In response, Teresa Halleck, CEO of San Diego County Credit Union stated: "We're not going to do that," even if it posed the risk of a class action lawsuit.

The complaint alleges other problems at the credit union.

Read the story.

Read the complaint.

Wednesday, October 30, 2013

Q3 2011 Discount Window Borrowings

According to data released by the Federal Reserve, 23 credit unions borrowed from the Discount Window in the third quarter of 2011. The total amount of borrowings during the quarter was $68.555 million. These credit unions went to the Discount Window an aggregate of 34 times.

Two credit unions from North Dakota accessed the seasonal credit program for a total of $12.718 million in loans. Seasonal credit is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs, such as financial institutions that are serving agricultural communities.

The rest of the credit unions used the primary credit program, which is reserved for a financial institution in sound financial condition.

The most frequent borrowers during the quarter were Wright Patman Congressional FCU (VA), Tip of Tx FCU (TX), and North Star Community CU (ND). Each credit union visited the Discount Window three times. (Click on image to enlarge)

Monday, October 28, 2013

International Remittances

The Dodd-Frank Act expanded the scope of the Electronic Fund Transfer Act to provide protections for senders of international remittance transfers.

On October 28, 2013, the Consumer Financial Protection Bureau's (CFPB) regulation governing international remittances goes into effect. The rule applies to banks, credit unions, and money transmitters that offer international transfers to consumers. However, it does not apply to companies that consistently provide 100 or fewer remittance transfers each year, nor does it apply to transactions under $15.

As of June 2013, there were 1,290 credit unions that originated at least one international remittance during the first six months of 2013. Half of these 1,290 credit unions originated 17 or less international remittances during the first half of 2013.

There are 374 credit unions that as of mid-year are on the pace of originating more than 100 international remittances this year and thus would be subject to the CFPB's regulation.

The average asset size of a credit union that would be subject to the CFPB remittance rule is $1.4 billion. However, half of the credit unions have less than $743 million in assets. Thirty-six credit unions have less than $100 million in assets.

The table below list the 25 credit unions that reported the most international remittances originated year-to-date, as of June 2013. (Click on image to enlarge) Three credit unions originated more than 1 million international remittances -- America First (UT), First Entertainment (CA), and CFCU Community (NY).

Friday, October 25, 2013

Credit Unions as Stealth CRE Lenders

An article in talks about the growth of credit unions as commercial real estate (CRE) lenders.

The article cites the expansion of CRE lending at NASA Federal Credit Union. According to Andy Stafford, director of Commercial Real Estate at NASA Federal Credit Union, commercial real estate lending at NASA Federal Credit Union is expected to increase by 30 percent to 35 percent in 2013.

The article notes that these loans are not micro transactions; but rather loans ranging in size from $1 million to more than $20 million.

The use of a credit union service organization makes it possible for the credit union to finance larger commercial real estate loans by partnering with other credit unions.

But should we as a society be providing taxpayer subsidized loans to fund commercial real estate projects?

Read the article.

Thursday, October 24, 2013

Number of Problem CUs Down; Assets and Shares in Problem CUs Up During Q3

The National Credit Union Administration (NCUA) reported today that the number of problem credit unions fell by 13 during the third quarter to 317. A problem credit union has a composite CAMEL rating of 4 or 5.

However, assets and shares (deposits) in problem credit unions increased during the quarter by approximately $600 million and $300 million, respectively. At the end of the third quarter, problem credit unions had $15.6 billion in assets and $13.7 billion in shares.

The percent of problem credit union shares to total industry shares rose from 1.54 percent at the end of June to 1.58 percent at the end of September. Assets at problem credit unions comprised 1.5 percent of the total industry's assets as of September 30, 2013.

NCUA noted that the number of problem credit unions with $1 billion or more in assets increased from 3 as of June 2013 to 4 at the end of September 2013. Total shares rose from $3.2 billion to $3.9 billion.

On the other hand, the number of problem credit unions with between $500 million and $1 billion in assets fell by 1 to 3 as of the end of the third quarter. Shares in these 3 problem credit unions equalled $1.7 billion.

Wednesday, October 23, 2013

Charitable Donation Accounts

In a comment letter filed on October 21, ABA clarified a point of fact and urged the National Credit Union Administration to amend a proposal on a federal credit union's funding of a charitable donation account (CDA).

Under the proposal, banks, savings associations, and trust companies may not manage the assets of the CDA, even if acting as trustee. The proposal states: “A regulated trustee or other person who is authorized to make investment decisions for a CDA (‘‘manager’’), other than the FCU itself, must be registered with the SEC as an investment advisor. This will help to ensure proper regulatory oversight of those professionals who owe fiduciary duties to the FCU, and to mitigate counterparty, credit, interest rate, liquidity, and reputational risks associated with funding a CDA.” The implication of the last sentence is that only investment advisors registered with the SEC are subject to proper regulatory oversight, owe a fiduciary duty to their client, and can mitigate the risks associated with funding a CDA.

In fact, banks, savings associations, and trust companies acting in a fiduciary capacity are subject to proper regulatory oversight, do owe a fiduciary duty to their clients and trust beneficiaries, and can mitigate risks associated with funding a CDA. There is, therefore, no reason to restrict the entities that can manage the CDA investments to registered investment advisors alone. Excluding banks, savings associations, and trust companies from managing the CDA’s investments will unnecessarily limit the options for FCUs looking for an investment manager.

In addition, the proposal states that "if an FCU chooses to establish a CDA using a trust vehicle, then the trustee must be an entity regulated by the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission (SEC) or another federal regulatory agency." However, this provision would exclude a nondepository state-chartered trust company from acting as a trustee, because it has no federal regulator.

ABA wrote: "There is no reasonable basis for such a restriction on nondepository state-chartered trust companies. All banks, savings associations, and trust companies, whether federally chartered or state chartered, are subject to the highest fiduciary duty when acting as trustee."

Finally, the proposal incorrectly characterized the fiduciary duties of banks, savings and loans, and trusts. “Contrary to the implication in the proposed rule, when providing those services, banks are indeed subject to a fiduciary duty and must act solely in the best interests of the clients or trust beneficiaries,” ABA said. “For these reasons, the proposal should be amended to allow both federal and state banks, savings associations, and trust companies to act as trustee and to manage the investments of the CDA.”

Read the letter.

Tuesday, October 22, 2013

Amicus Brief Filed in Interchange Fee Case

Bank and credit union trade groups yesterday filed a friend of the court brief in the case over the Federal Reserve’s interchange rule, noting that they oppose the Fed’s rule capping interchange fees but are even more strongly against Judge Richard Leon’s ruling that the fee cap should be lower still.

“The district court’s decision, if affirmed, would make things significantly worse,” the groups said. “It compounds the Board’s legal error through a construction that would require deep cuts -- amounting to many billions of dollars each year -- into issuers’ remaining interchange-fee revenues.”

The groups argued that Leon misinterpreted how much of the card issuer’s cost can be recovered under the statute, that he ignored the statute’s “reasonable and proportional” fee allowance and that he went beyond the law’s requirements on exclusivity. “The district court’s constructions would gravely harm all participants in the electronic debit-card system through reduced services, diminished investment in innovation, increased fees to consumers, and disruptive technological changes -- all with no tangible offsetting economic benefit,” they argued.

In July, Leon said that the Fed’s rule violated congressional intent in the Dodd-Frank Act by setting the interchange fee cap too high and failing to allow merchants to choose multiple unaffiliated PIN and signature networks for each card transaction they process. The case is currently on expedited appeal to the D.C Circuit Court of Appeals.

Read the brief.

Monday, October 21, 2013

Canadian CU Execs Share Views on CU Tax Exemption

Credit Union Times has posted a video from the 4th Annual CU Water Cooler Symposium where two Canadian credit union executives share their thoughts about the U.S. credit union tax exemption.

As background, Canadian credit unions lost their tax exemption in the 1970s.

Gene Blishen, general manager at Mount Lehman Credit Union, commented that paying taxes allow Canadian credit unions to sit at the table. He believes that not paying taxes closes doors for credit unions.

William Azaroff, director of business and community development at Vancity, stated that credit union tax exemption is hindering the ability of credit unions to serve their members.

Click on this link to go to the article and video.

Friday, October 18, 2013

Lack of Specialized Training Related to MBLs

In 2003, the Government Accountability Office forewarned that NCUA faced challenges ensuring that examiners have sufficient training to be adequately prepared for monitoring credit unions as they expanded more heavily into nontraditional credit union activities such as business lending.

However, NCUA did not appear to take this warning to heart in a timely fashion, as Chetco FCU's failure highlights.

According to Chetco's Material Loss Review, "there was a lack of understanding and specialized training for staff regarding the complexity surrounding the origination and monitoring of member business loans."

The report notes that the Examiner-in-Charge (EIC) did not receive any formal training with regard to evaluating business credits. The training records for the EIC involved in supervising Chetco from 2005 to 2011 going as far back as 1999 showed no specific training related to member business lending.

The Inspector General report recommended that "NCUA management ensure that during the Individual Development Plan process, supervisors perform a review of the training courses completed by examiners to ensure that the courses taken are in connection with their assigned responsibilities and to determine whether examiners have been exposed to the right mixture of course material...When critical changes occur in the industry or in the content of courses previously taken, examiners should consider re-taking those refreshed courses."

The report states that in 2010 NCUA created specialized positions to help provide more expertise in the lending area.

Regrettably, the agency belated recognized that it needed specialized personnel to exam credit unions that had moved into nontraditional activities.

Thursday, October 17, 2013

Gropaco Members Approve Liquidation

Last week, I reported that the Board of Directors of Gropaco Federal Credit Union (Groveton, NH) recommended that its members support liquidating the credit union.

The Berlin Daily Sun is reporting that the membership of the Gropaco approved the voluntary liquidation of the credit union in a special meeting held on October 12.

The credit union hopes to finalize the liquidation in six months.

Read the story.

Wednesday, October 16, 2013

Region V Director Overrode Examiners' Attempt to Limit Chetco's MBL Exposure

In case you missed it, there is an interesting excerpt from NCUA's Material Loss Review on Chetco FCU.

NCUA examiners were trying to place limits on the credit union's member business loan (MBL) portfolio; but the Region V Regional Director overrode its examiners granting Chetco's appeal to increase its MBL exposure.

“Examiners issued a DOR and placed restrictions on further MBL lending. In the DOR, examiners required Chetco management to reduce the MBL portfolio as a percentage of net worth to 500 percent by December 31, 2009. Management appealed the reduction of MBL’s, stating that Chetco had approximately $100 million in MBL loan applications in the pipeline prior to the NCUA issuing the DOR. In its appeal, Chetco management requested that the Region:

[e]liminate the quarterly Member Business Loan (MBL)/Net Worth ratio targets and increase the December 31, 2009 limits on the MBL/Net Worth ratio from 500 percent to 600 percent.

In a letter to Chetco management dated March 3, 2009, the Region V Regional Director granted the appeal.”

At the time the Region V Regional Director granted Chetco's appeal, the credit union had a composite CAMEL rating of 3 indicating supervisory concerns.

This does make you question the judgement of the Region V Regional Director, especially when the available evidence showed that Chetco was a supervisory concern and MBL delinquencies were on the rise.

Monday, October 14, 2013

CUNA Mutual Delivers Black Eye to CUs

CUNA Mutual Group has made the decision to discontinue its Life Savings Insurance product, which was first introduced in 1938.

For CUNA Mutual, this was strictly a business decision.

However, for the roughly 1,200 credit unions that offered the product, they are now in the process of informing their members that they will not honor these contracts and credit unions are getting the bad press.

Take for example an ABC News story about a 92-year Minneapolis woman who was notified by her credit union that it was cancelling her insurance policy that she hoped to use to pay for her funeral. (read the story)

The headline to the story read "92-Year-Old's Funeral Insurance Cancelled by Credit Union."

The credit union told this senior citizen that they would give her an extra one percent on her $2000 savings account in lieu of the cancelled policy.

How long would it take for the accumulated interest on this savings account to reach $2,000 -- the amount of the benefit to be paid by the life insurance policy?

Assuming an interest rate of 2 percent, it would take approximately 35 years.

According to the Minneapolis Star-Tribune, approximately 1,500 members of the credit union had their policy cancelled.

So much for people helping people.

Friday, October 11, 2013

Board Recommends Liquidating CU

The board of directors of Gropaco Federal Credit Union of Groveton, NH is recommending that its members approve the voluntary liquidation of the credit union.

The board made the decision because the credit union faces a business environment where costs are outpacing revenues. The credit union has been unprofitable, since 2008.

The action came after months of deliberations and numerous efforts to seek a merger.

Members are scheduled to vote to liquidate the credit union on October 12.

Read the story.

Wednesday, October 9, 2013

America First CU Sponsors Utah Jazz Dance Team

America First Credit Union is the new presenting sponsor of the Utah Jazz dance team.

While the terms of the deal were not disclosed, a source indicated that such sponsorships usually range between $400,000 and $500,000 per year and require a three year commitment.

Is sponsoring a NBA team's dance squad the appropriate use of the credit union tax exemption?

Read the story.

Tuesday, October 8, 2013

If You’re Reading This, You Can Join

SCE Federal Credit Union in Irwindale, California appears to be flaunting the requirements that federal credit unions have a common bond.

The credit union's website says:
“Is it easy to join the Credit Union?”

“If you’re reading this, you can join SCE FCU. You only need $15 to open your account ─ $5 goes into your savings and secures your ownership in the Credit Union, and the remaining $10 is a tax-deductible donation to our non-profit SCE FCU Foundation.”
Stating that if you’re reading this, you can join SEC FCU indicates this credit union is open to anyone.

This appears to violate the spirit of a letter that NCUA sent federal credit unions in September regarding impermissible common bond advertisement. NCUA wrote: “If your credit union is advertising that anyone, without limitation, is able to become a member of your credit union, then you may be in violation of federal law and regulation.”

Moreover, a $10 tax-deductible donation to the credit union’s foundation does not meet the requirement of having a common bond.

Click on image to enlarge.

Monday, October 7, 2013

Member Business Loans Caused Chetco's Failure

The Material Loss Review (MLR) of National Credit Union Administration's Office of the Inspector General (OIG) found that Chetco FCU (Brookings, Oregon) failed because of inadequate management and board oversight of the credit union's member business loan program. In addition, the MLR points out that NCUA examiners missed numerous red flags with regard to Chetco's member business lending.

The loss to the NCUSIF is estimated at $76.5 million.

The report noted that Chetco experienced rapid growth in its business loan portfolio, as it took advantage of its exception to the member business loan cap of 12.25 percent of assets and its waivers of Member Business Loan regulations.

Member business loans grew from $33.2 million (21.5 percent of assets) in 2002 to a high of $212 million in 2009, before leveling off to $189.4 million (56 percent of assets) in 2010. This represented an increase in member business loan concentrations from less than 26.6 percent of total loans as of 2002 to over 60 percent as of December 2009.

The report also notes that Chetco's business lending operation expanded outside its local market area to as far away as New Mexico and North Carolina. The credit union used its wholly-owned credit union service organization (CUSO), Commercial Lending Solutions, to facilitate the growth in its business loan operations.

As economic conditions deteriorated in 2007 and 2008, especially the real estate market, delinquencies rose at Chetco. However, Chetco initially tried to use loan renewals and modification to mask the deterioration in its member business loan portfolio. NCUA examiners were tipped off to this practice by a member's complaint.

The MLR notes that Chetco management funded its rapid loan growth through a combination of borrowed funds and deposit products with above-market rates. However, as Chetco's financial condition deteriorated, its sources of liquidity became restricted.

The report further states that Chetco failed to operate its business lending CUSO in a safe and sound manner by intertwining the operations of the Credit Union and CLS with no clear delineation of each entity’s respective employee responsibilities.

The report is critical of NCUA's supervision of Chetco. It notes the lack of resources and time spent performing a comprehensive review of Chetco's business loan portfolio. Examiners did not do adequate examination of member business loan renewals and modifications.

Also, based upon training records going back to 1999, the MLR found that the Examiner-in-Charge of supervising Chetco from 2005 to 2011 had no training specific to member business lending. This is troublesome given the complexity of the credits in Chetco's member business loan portfolio.

Read the Material Loss Review.

Friday, October 4, 2013

Survey: Majority of Iowans Favor Eliminating CU Tax Exemption

A survey of 500 Iowans ranging in ages from 18 to over 65 by Victory Enterprises found that a majority of Iowans (58 percent) were not aware that large credit unions with billions in assets are exempt from paying income taxes on their profits.

Upon learning about the credit union exemption, the majority of survey respondents (53 percent) were in favor of eliminating it. Another 23 percent were not sure what to do about it, and only 20 percent supported keeping it.

The impact of these exemptions on personal income taxes was also a concern among the Iowans surveyed. The majority of the survey respondents (55 percent) believed their personal income taxes were higher when other potential taxpayers enjoy significant tax exemptions or loopholes. Only 26 percent of survey participants disagreed with this position.

Approximately 73 percent of the survey respondents had their primary checking or savings account at a bank, while 18 percent had their primary account at a credit union.

Among individuals who identified a credit union as their primary depository institution, there was some interesting findings.
  • 67.8 percent of the people believe their personal income taxes are higher when other taxpayers enjoy significant tax exemptions or loopholes.
  • 55.6 percent of respondents did not know that large credit unions did not pay income taxes on their profits.
  • 46 percent supported eliminating the credit union tax exemption versus 33.3 percent that supported keeping the tax exemption.
The survey was sponsored by the Iowa Bankers Association.

The margin of error for the survey was 4.38 percent.

Thursday, October 3, 2013

Reasonable Compensation

Earlier this year, Washington state enacted legislation that allows a state chartered credit union to pay its directors and supervisory committee members reasonable compensation for their service as directors and supervisory committee members.

The Washington Division of Credit Unions is now in the process of trying to define what constitutes reasonable compensation.

A first draft of a rulemaking document defines what reasonable compensation is not.

"Compensation is not considered reasonable if it is disproportionate to the services provided by the director or supervisory committee member, unreasonable considering the financial condition of the credit union, or is not comparable to compensation paid to organizations of a comparable size, geographic location, and operational complexity."

The Washington Division of Credit Unions further notes that reasonable compensation should not lead to a material financial loss to the credit union.

Wednesday, October 2, 2013

Cease and Desist Order Issued to Bagumbayan Credit Union

The National Credit Union Administration has issued a cease and desist order to Bagumbayan Credit Union of Chicago.

On three separate occasions in 2012, the Illinois Department of Financial & Professional Regulation suspended the operations of the credit union for substantial non-compliance with the state's credit union act.

The NCUA consent order requires the credit union to undertake several actions, including:

1. Cease and desist allowing unapproved officials to attend board meetings, serve on committees, or perform any and all managerial functions, operational functions, or both.

2. Refrain from implementing any aspects of a proposed business plan involving the establishment of new lines of business, including money remittance services, the sale and/or marketing of insurance product, establishment of non-vessel operating cargo company, or pursuit of loans secured with foreign collateral.

3. Resolve all recordkeeping issues and Bank Secrecy Act violations detailed in exam reports.

4. Ensure secure storage and transmission of all member data consistent with NCUA’s Rules and Regulations for safeguarding member information.

5. Comply with all lawful directives of the state regulator, including all elements of the suspension order issued by that agency.

Read the cease and desist order.

Tuesday, October 1, 2013

Lake Michigan -- Poster Child for Why CUs Should Pay Taxes

Lake Michigan Credit Union in Grand Rapids, Michigan is a perfect poster child for abolishing the credit union's tax exemption.

The credit union has $2.9 billion in assets at the end of the second quarter 2013.

It reported a profit of $78.3 million for 2012. Its return on assets was 3.04 percent.

Lake Michigan Credit Union operates a used car auto center. What does a car dealership have to do with its exempt purpose?

Now, this highly profitable credit union is advertising anyone can open an account.


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