Mortgage Recording Tax

Arguments are scheduled to be heard today in the New York Supreme Court over whether federal credit unions operating in New York are exempt from the state's mortgage recording tax.

New York assesses two mortgage recording taxes -- a regular mortgage recording tax that is paid by the borrower and a "special additional mortgage recording tax" that is paid by the lending institution

According to the New York Times, Hudson Valley Federal Credit Union, in Poughkeepsie, N.Y., is suing the state of New York. The credit union contends that New York State forced the credit union to collect the recording tax, despite its tax-exempt status. Hudson Valley Federal Credit Union is seeking a refund of all of the special additional mortgage recording taxes paid prior to the Tax Department's ruling that the credit union is exempt from the tax.

The complaint states that Hudson Valley FCU and other federal credit unions, as instrumentalities of the United States government, are afforded immunity from taxation under the Supremacy Clause of the United States Constitution in that a state cannot tax an instrumentality of the United States government without the express authorization of Congress. The U.S. Justice Department filed a brief supporting the federal credit union.

However, the New York Times wrote that:

The state maintains that it has not violated the tenets of the Federal Credit Union Act of 1934, which stipulates that credit unions “shall be exempt from all taxation,” except on real and tangible personal property. The tax, the state says, is not on the credit union or on mortgages but for the privilege of recording a mortgage.

A decision is expected in about 6 weeks.

If the credit union wins the case, the state of New York could lose millions of dollars of revenue.

NCUA Issues White Paper on Supplemental Capital

NCUA’s Supplemental Capital Working Group (the Working Group) issued a White Paper on supplemental or secondary capital for credit unions.

The White Paper states that credit unions rely almost exclusively on retained earnings to build capital. Currently, only two types of credit unions can issue supplemental capital – low-income credit unions and corporate credit unions. Congress in 1998 limited credit union net worth to retained earnings as defined by generally accepted accounting principles. Therefore, the Federal Credit Union Act would have to be amended to allow federally-insured credit unions to count supplemental capital as part of their net worth.

“The Working Group concluded that any form of supplemental capital for credit unions should adhere to three key public policy principles: (1) preservation of the cooperative mutual credit union model; (2) robust investor safeguards; and (3) prudential safety and soundness requirements.”

There are two important characteristics associated with supplemental capital – 1) the source of supplemental capital and 2) the equity characteristics of the supplemental capital.

The Working Group identified three alternative forms of supplemental capital that meet the aforementioned principles – Voluntary Patronage Capital (VPC), Mandatory Membership Capital (MMC), and Subordinated Debt (SD).

“ VPC would be uninsured and subordinate to the National Credit Union Share Insurance Fund (NCUSIF), and would be used to cover losses that exceed retained earnings. These instruments are intended to allow members with the financial wherewithal, under strict suitability and disclosure standards, to support the credit union by contributing capital. Purchase of this type of supplemental capital instrument would be optional for natural person members, but not available to institutional members. Voting rights and access to all credit union services otherwise available to members may not be contingent in any way on the purchase of VPC. This type of supplemental capital would function as equity, not debt, as it is a very long term, noncumulative capital instrument. Given its utility as capital, VPC would count toward both the net worth ratio and the risk-based net worth ratio, but subject to certain limits given mutuality and risk considerations.

MMC would function as equity, not debt, as it approximates a perpetual, non-cumulative capital instrument. Purchase of this type of supplemental capital would be a condition of membership for any person or entity eligible to join the credit union. The idea behind this form of capital is to allow credit unions to convert the par value share currently required to be a member of the credit union in good standing to a form of supplemental capital. Specifically, the minimum single par share which a member is required to “purchase” to be a member of the credit union would be uninsured and subordinate to the NCUSIF. Subject to prior regulatory approval, individual credit unions would opt-in to this type of membership structure by adoption of a standard bylaw amendment.

Given its utility as capital, MMC would count without limit toward both the net worth ratio and the risk-based net worth ratio. It is intended to reflect the cooperative “ownership” and voting rights every member of the credit union has, without changing the one member-one vote principle. It more explicitly reflects each member’s ownership stake in the credit union.

SD is the third general category that could satisfy to various degrees the key public policy principles. SD would be uninsured, subordinate to the NCUSIF, and would be used to cover losses that exceed retained earnings and any MMC or VPC capital. It would have a 5-year minimum initial maturity or notice period with no early redemption option for the investor. Credit unions issuing SD would need to be subject to standard marketplace investor suitability standards and disclosures. SD may not convey any voting rights, involvement in the management and affairs of the credit union, or be conditioned on prescriptive measures directing the credit union’s business strategies. This type of supplemental capital would function as a hybrid debt-equity instrument. It is the Working Group’s belief that this type of capital instrument should be limited to institutional investors, regardless of whether such investors are members of the credit union or external. Given the debt characteristics and shorter minimum initial maturity, SD would only count toward the risk-based net worth ratio, and only up to 50% of capital instruments (including retained earnings) counting toward the net worth ratio.”

Matz: If NCUA Had Not Acted, Corporate CU Crisis Would Have Been Catastrophic

In a speech to the Texas Credit Union League on April 8, NCUA Chairman Debbie Matz told the audience of credit union officials that if numerous actions to address the corporate credit union crisis had not been taken, the credit union industry would have faced grave systemic risk.

Ms. Matz said:

“About 90 percent of natural-person credit unions had investments in the corporates. If the corporate system had collapsed, the natural-person-credit-union system would have suffered huge and insurmountable losses – shattering confidence in all of America’s credit unions. Since they had such large investments in the corporates, credit unions would have lost about $30 billion in net worth – about one-third of the net worth of all natural-person credit unions at the time. That would have led to the collapse of at least 800 – perhaps as many as 1,200 – natural-person credit unions.

In addition, the federal Share Insurance Fund would have had to levy huge assessments on the remaining credit unions, in order to cover the remainder of the losses. It is uncertain whether those remaining credit unions could have withstood the strain. They would have been facing enormous costs in terms of capital, along with a catastrophic loss of public confidence.”

Below are some of the extraordinary governmental actions that have been taken to keep corporate credit union crisis from becoming a systemic crisis for all credit unions:

• Encouraging corporate credit unions with large unrealized losses on holdings of mortgage backed securities (MBS) to make application to the Federal Reserve Discount Window.

• Converting loans made by corporate credit unions to natural person credit unions to Central Liquidity Facility (CLF)-funded loans using funds borrowed by the CLF from the U.S. Treasury.

• Announcing and implementing the Temporary Corporate Credit Union Liquidity Guarantee Program (TCCULGP) on October 16, 2008. The TCCULGP provides a 100 percent guarantee on certain new unsecured debt obligations issued by eligible corporate credit unions.

• Announcing and implementing the Credit Union System Investment Program (CU SIP) and the Credit Union Homeowners Affordability Relief Program (CU HARP).

• Approved issuance of a $1 billion NCUSIF capital note to U.S. Central as a result of pending realized losses on MBS and other asset-backed securities.

• Approved the Temporary Corporate Credit Union Share Guarantee Program (TCCUSGP), which guarantees uninsured shares at participating corporate credit unions through June 30, 2012.

• Legislation creating a Temporary Corporate Credit Union Stabilization Fund (CCUSF), which would borrow money from the Treasury for up to seven years and use the money to pay expenses associated with the ongoing problems in the corporate credit union system.

Director Liability

In a letter to the editor of Credit Union Times in the March 24, 2010 issue, Henry Wirz, President of SAFE Credit Union, objected to credit union directors’ exposure to personal liability. He wrote:

“Bob Fenner [NCUA’s General Counsel] opined that the WesCorp board of directors has no indemnity. What does that mean? It means that all of our volunteers who claim indemnity under a board resolution (that is most of our volunteers) have no indemnity. That means whenever the NCUA comes in and takes over a credit union that any board member loses his indemnity and has to dig into his own pockets to defend himself.”

He worries that if “directors do not have indemnity, then who will serve?”

Henry, welcome to the world that bank directors have lived under for the last twenty years. Bank directors can be held personally liable for losses when a bank fails. FDIC writes that “[l]awsuits against former directors and officers of failed banks result from a demonstrated failure to satisfy the duties of loyalty and care.” See FDIC’s Statement Concerning the Responsibilities of Bank Directors and Officers.

Credit Insurance and AD&D Not Subject to UBIT

The U.S. District Court for the District of Colorado ruled that Bellco Credit Union is not liable for unrelated business income taxes (UBIT) paid on revenues earned from the sale of credit life and credit disability insurance and accidental death and dismemberment (AD&D) insurance.

Bellco CU was seeking a refund of $199,293 for taxes paid in 2000, 2001, and 2003.

In the Bellco CU case, the court found that credit life and credit disability insurance is related to a credit union’s exempt purpose of “promoting thrift” to its members. This ruling comes eight months after another federal court in Wisconsin found that Community First CU was not liable for UBIT on credit life products.

The court also found that Bellco is exempt from UBIT on AD&D insurance it offered through a third-party provider, Affinion. The Court found that revenues earned on the insurance amounted to royalties paid by Affinion and the Internal Revenue Code expressly excludes royalty income from UBIT.

However, Judge Christine M. Arguello did find that Bellco Credit Union was liable for UBIT on its share of the profits from its membership in an indirect lending association with other credit unions, Credit Union Indirect Lending Association (CUILA).

Only state chartered credit unions are subject to UBIT.

NCUA Misses Another Deadline

Another April 1st has passed and NCUA has once again missed its deadline for publishing its Annual Report.

The Federal Credit Union Act states that “[n]ot later than April 1 of each calendar year, and at such other times as the Congress shall determine, the Board shall make a report to the President and to the Congress. Such a report shall summarize the operations of the Administration and set forth such information as is necessary for the Congress to review the financial program approved by the Board.”

I’m not talking about its 2009 Annual Report. We are still waiting for NCUA to publish its 2008 Annual Report.

It is more than one year late.

If the NCUA Board cannot meet this simple deadline, how can it be expected to handle the added responsibility of regulating an increase in credit union business lending authority?

NCUA's Disclosures for Credit Unions Switching to a Mutual Bank Charter (Part I)

NCUA has had a history of prescribing how credit unions should communicate to their members regarding the issue of charter choice. However, these disclosures are speculative and misleading.

One example of a speculative and misleading disclosure is where NCUA requires a credit union that seeks a mutual savings bank charter to disclose that if a credit union switches to a mutual savings bank charter, some types of consumer loans would be less available. The goal is to frighten credit union members to oppose the change in charter.

According to NCUA’s regulations (Section 708a.1040), the agency requires “a clear and conspicuous disclosure of how the conversion from a credit union to a mutual savings bank will affect the institution’s ability to make non-housing-related consumer loans because of a mutual savings bank’s obligations to satisfy certain lending requirements as a mutual savings bank. This disclosure should specify possible reductions in some kinds of loans to members.”

First, let me set the record straight on the consumer lending authority for federal savings associations. Federal savings associations have no statutory limitations with respect to credit card loans and can make non-credit card consumer loans up to 35 percent of their assets.

Second, looking at the year-end financials for all federally-insured credit unions, I found that non-housing-related consumer loans, excluding credit cards, were only about 26 percent of all assets for federally-insured credit unions. This would suggest that a number of credit unions have already self selected not to make non-housing-related consumer loans. So, the member would not necessarily experience a reduction in non-housing-related consumer loans.

Unfortunately, NCUA’s one-size-fits-all required disclosures cause confusion, so who is misleading whom?