FIRST QUARTER SUMMARY

1
INSIDE WASHINGTON A CREDIT UNION UPDATE
Allied Solutions Summer Networking Conference
Beaver Creek, Colorado August 31, 2009
Presented by Dan Berger Executive Vice
President, Government Affairs National
Association of Federal Credit Unions
2
OVERVIEW

• Congress Today
• Legislative Issues
• Regulatory Issues

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CONGRESS TODAY

• Focus on Consumer Issues!

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LEGISLATIVE ISSUES
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Legislative Issues

• CURIA
• Declining interest in reg relief presents
  uncertain future in 111th Congress
• Senator Chuck Schumer (D-NY) announces intention
  to introduce bill to remove CU Business lending
  cap
• Congressmen Kanjorski and Royce introduced H.R.
  3380, Promoting Lending to Americas Small
  Business Act of 2009, on July 29, 2009

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Legislative Issues (cont.)

• NCUA Corporate Plan
• NAFCU Testifies on Deposit Insurance Issues
  before Senate Banking FI Subcommittee on 3/19/09
• NAFCU testifies on House plan as part of H.R.
  2351 on 5/20/09
• Stabilization plan part of S. 896, became law on
  5/20/09

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Legislative Issues (cont.)

• EESA/TARP/CLF in 111th Congress
• (Emergency Economic Stabilization Act/Troubled
  Assets Relief Program/Central Liquidity Facility)
• NCUA and NAFCU led efforts to allow the CLF to
  borrow up to its authorized amount of 41.5
  billion by removing artificial cap.
  Appropriations Omnibus allows that level until
  end of FY 09 FY 10 Appropriations bills
  continue to remove cap

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Legislative Issues (cont.)

• Regulatory Restructuring
• Push to restructure financial regulators
• NAFCU working to protect NCUA/NCUSIF
• Frank, Dodd both have stated CUs not at fault for
  crisis
• Administration Proposal maintains federal charter
  and independent NCUA

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Legislative Issues (cont.)

• Regulatory Restructuring
• Focus on Systemic Risk Regulator, Consumer
  Protection, Executive Compensation
• H.R. 3126 would create new Consumer Financial
  Protection Agency
• Would transfer NCUA consumer authority to CFPA
• NAFCU letter to HFSC on 6/23/09 Create CFPA for
  unregulated create consumer office at NCUA
• Direct and indirect cost to credit unions
• House attempting to complete a package of bills
  by Fall Senate likely to take up one large bill
  by end of year.

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Legislative Issues (cont.)

• Credit Cards
• H.R. 627, The Credit Card Accountability
  Responsibility and Disclosure Act of 2009 signed
  into law on 5/22/09
• Issue with provision requiring 21-day statement
  notice on all open-end lines of credit in order
  to charge a late fee
• Could eliminate consolidated statements and due
  date flexibility
• Effective August 20, 2009
• NAFCU has contacted key House and Senate members
  on this issue working with them, NCUA and Fed in
  effort to resolve
• NAFCU seeking legislative fix when Congress
  returns in September

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Legislative Issues (cont.)

• Interchange Fees
• Merchants announce campaign targeting 7 key
  lawmakers on 3/30/09
• NAFCU responded with grassroots effort with CUs
  in those districts
• Study passed as part of Credit Card bill (H.R.
  627)
• No action yet on introduced bills
• H.R. 2362 (Rep. Welch)
• H.R. 2695 (Rep. Conyers)
• H.R. 1212 (Sen. Durbin)
• NAFCU successful in fending off attempts to
  attach interchange legislation to credit card
  bill and appropriations legislation

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Merchants Newspaper Ad

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NAFCUs Newspaper Ad

• i

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NAFCU/CUNA Newspaper Ad
The giant retailers are lobbying Congress for a
sweetheart deal - H.R. 5546. WHO WINS The
giant retailers who reap higher profits and
get exemptions from antitrust laws that could
lead to abuse. WHO LOSES Consumers who will
never see the savings. Small credit unions that
get squeezed. Local communities that will have
fewer choices for credit services. Tell
Congress H.R. 5546 means consumers lose.
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Legislative Issues (cont.)

• Overdraft Fees
• Carolyn Maloney (D-N.Y.), Chair of the House
  Financial Institutions Subcommittee, reintroduced
  legislation H.R. 1456, on 3/12/09 to make the
  overdraft process as transparent as possible
• Could eliminate credit union overdraft programs
• GAO Report released 3/3/08 some disclosure
  issues for CUs, but CU fees generally lower
• Payday lenders tying their fees to costs of
  overdraft in payday lending debate
• Chairman Dodd has indicated he may want to look
  at issue as well

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Legislative Issues (cont.)

• Mortgage Bankruptcy Reform
• House passed broad cram-down measure as part of
  H.R. 1106 this Spring
• Senate Defeats Durbin Amendment to S. 896 by vote
  of 45-51
• Durbin amendment would have used Obama
  modification program as a screen giving lenders
  a veto over bankruptcy by offering a
  modification
• NAFCU letter led efforts expressing concerns
  about negative impact on credit unions
• Senator Durbin, Chairman Conyers, and Chairman
  Frank have all said issue could arise again in
  the Fall if foreclosure and modification numbers
  dont improve

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Legislative Issues (cont.)

• CRA
• Rep. Eddie Bernice Johnson (D-TX) introduced H.R.
  1479, the Community Reinvestment Modernization
  Act of 2009 on 3/12/09
• Goal to modernize and expand CRA
• Would extend CRA requirements to Credit Unions
  and other institutions
• Currently has 46 co-sponsors
• No companion bill in the Senate

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Legislative Issues (cont.)

• CRA
• State Chartered CUs in Mass and CT have CRA
• Barney Frank in 3/2007 Independent Banker (ICBA
  Magazine) CRA to credit unions
• HFSC Hearing on 30th Anniversary of CRA on
  2/13/08
• NCRCs John Taylor says CUs discriminating
• NAFCU letter in record
• Issue could arise as part of Reg Reform

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REGULATORY ISSUES
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TREASURY PLAN FOR REGULATORY RESTRUCTURING

• The goal is to create a more stable regulatory
  regime that is flexible and effective that is
  able to secure the benefits of financial
  innovation while guarding the system against its
  own excess.
• Timothy Geithner and Lawrence Summers,
• The Washington Post, Monday, June 15,
  2009

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TREASURY PLAN FOR REGULATORY RESTRUCTURING

• Financial Regulatory Reform
• The creation of a new Financial Services
  Oversight Council of financial regulators
• The enhanced regulation of securitization markets
• The creation of a new Consumer Financial
  Protection Agency to focus on consumer protection
  in credit, savings and payments markets
• The creation of a National Bank Supervisor Agency
  with separate status in Treasury with
  responsibility for federally chartered depository
  institutions
• Raise international regulatory standards and
  improve international cooperation

22
NCUA Board Composition

• Deborah Matz-D
• Chairman
• Term expires April 10, 2015
• Gigi Hyland-D
• Expected vice chair
• Term expires August 2, 2011
• Michael E. Fryzel-R
• Term expires August 2, 2013

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Corporate System Restructuring

• Corporate credit unions should continue to serve
  the liquidity and operational/payment systems
  needs of natural person credit unions
• Any solvent corporate credit union should be
  permitted to survive voluntary mergers will
  achieve economies of scale
• Corporates investment authority should be
  carefully regulated for investment authority
  going forward, knowledge is key and independent
  risk analysis must be performed
• Corporate credit unions should operate under a
  risk-based capital system
• Maintaining membership capital should not be
  mandatory
• Voluntary membership capital should be structured
  with a maximum cap and assessments based on usage

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Corporate System Restructuring

• Corporate credit unions should operate under
  corporate governance standards created and
  policed within the industry
• Board members should consist of only qualified
  natural person credit union directors and staff
• There should be term limit requirements such as 3
  years, 3 terms
• There should be no trade association or league
  staff members allowed on corporate boards
• There should be an independent supervisory
  committee that can hire outside expertise as
  needed
• There should be an investment oversight
  committee it should be permissible for outsiders
  to be members of the committee to access
  requisite expertise

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Corporate System Restructuring

• NCUA will issue their proposed rule this fall.
  They have announced that they will hold a series
  of town hall meetings to discuss the rule. It
  will likely include
• Concentration risk amendments
• Changes to Capital requirements
• At present there is not a plan to require natural
  person credit unions to recapitalize the
  corporate system

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Corporate Stabilization Implementation

• Borrowed 1 billion from Treasury to pay for the
  acquisition of the 1 billion U.S. Central
  Capital Note from the NCUSIF  as a result, the
  NCUSIF will no longer hold the capital note, will
  recognize a recovery of the 1 billion expense,
  and thus will have an increase in equity of 1
  billion
• The NCUA Board directed NCUA staff to take
  necessary actions to legally transfer the
  obligation for performance of the Temporary
  Corporate Credit Union Share Guarantee Program
  (TCCUSGP) from the NCUSIF to the Stabilization
  Fund
• The NCUA Board directed NCUA staff to take
  necessary actions to legally transfer the
  obligations of the NCUSIF under the Temporary
  Corporate Credit Union Liquidity Guarantee
  Program (TCCULGP) to the Stabilization Fund

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Corporate Stabilization Implementation

• Credit Unions will be billed in September to
  increase the insurance fund to its normal
  operating level

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Proposed Rule Implementing the S.A.F.E. Act

• The proposed rule would implement provisions of
  the Secure and Fair Enforcement for Mortgage
  Licensing Act
• The SAFE Act requires that federal agencies that
  regulate financial institutions promulgate rules
  governing the registration of mortgage loan
  originators employed by the institutions they
  regulate
• The SAFE Act requires states to create a system
  of licensing all other mortgage loan originators
• Under the proposed rule, employees of
  federally-insured credit unions would be required
  to register with the Nationwide Mortgage License
  System and Registry (Registry). Similarly,
  federal credit unions would be required to
  register with the Registry
• State-chartered CUSOs would have to be licensed
  under state law
• NAFCU supports amendments to the rule to broaden
  the exemption for loan originators

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Unfair or Deceptive Acts or Practices (UDAP)

• NCUA, along with the Federal Reserve and the
  Office of Thrift Supervision issued a joint final
  rule prohibiting certain credit card practices
• The rule is effective July 1, 2010
• Part 706 of NCUAs regulations
• Only FCUs not to state-chartered CUs
• Overlaps with Credit Card Act

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Credit CARD Act

• Amends TILA, supersedes UDAP Regulation Z
• Most provisions effective February 22, 2010
• Two provisions were effective August 20, 2009
• 45-day advance notice
• Statement sent 21 days before due date
• Open end consumer credit plan (not just credit
  cards)

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Credit Card Act-21-Day Notification

• No payment shall be charged a late fee unless
  statement is sent 21 days before the due date
• Applies to all open end consumer credit plans
• Not limited to credit card accounts
• Loanliner and other open-end billing issues
• If the CU offers a grace period, must be at least
  21 days
• Grace periods are not mandated by the Act

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21-Day Notification

• NAFCU Response
• Letter to Chairman of the Federal Reserve, July
  30, 2009
• Letter to the NCUA Board, July 31, 2009
• Meeting with the Federal Reserve, August 6, 2009
• Ongoing discussions with NCUA regarding
  examination issues
• Letter to NCUA, August 19, 2009 regarding issuing
  more guidance

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Internet Credit Reports

• CUs will be required to post their credit card
  agreements on their websites
• Fed collects and aggregates agreements from the
  industry (including CUs) and posts on a public
  website
• Needs Regulations from Fed
• Ads for free credit reports must include
  reference to AnnualCreditReport.com

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Credit Cards to Under 21

• Applications by a person under 21 for open end
  consumer credit must include
• Submission of financial info indicating
  independent means of repaying obligation (needs
  Fed regulations), OR
• Signature of cosigner (parent, guardian, spouse,
  or other person over 21)
• Prescreen offers to persons under 21 prohibited
• Joint credit cards no increase in credit card
  limit unless approved by parent, guardian,
  spouse, etc

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Central Liquidity Facility

• Background
• CLF a source of backup liquidity for CUs
• By statute, CLF can borrow up to 12 times
  subscription (currently at 43.8 B)
• Recent Actions
• Changes in investment policy shift of funds from
  US Central to U.S. Treasury securities
• Shift due to accounting issue auditors finding
  that current 1.8 B of funds in U.S. Central is
  contra equity and not an asset, resulting in
  reduction of CLFs borrowing authority
• Change in future funding arrangement NCUA
  examining ownership of stock (expected rulemaking
  in near future)
• Key issue the greater the subscription, the
  greater the CLF borrowing authority to meet CUs
  liquidity needs

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Home Valuation Code of Conduct

• What is the HVCC?
• The Home Valuation Code of Conduct (HVCC)
  contains requirements related to appraisals,
  including what lenders must do to ensure
  appraiser independence and avoid conflict of
  interest, that lenders that sell mortgage loans
  to Fannie Mae and Freddie Mac must agree to
  follow
• Resulted from an agreement between the GSEs,
  OFHEO (predecessor of FHFA) and the NY Atty. Gen.
• Applies to all lenders that sell to Fannie and
  Freddie, not just those in NY, and became
  effective on May 9, 2009
• Compliance and Cost Challenges CUs finding the
  requirement of complete segregation of duties by
  CU employees to be costly
• NAFCU supporting moratorium until less costly
  alternative found to ensure appraiser
  independence and avoid conflict of interest

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Unrelated Business Income Tax (UBIT)

• General Rule Organizations exempt from federal
  income taxation are subject to UBIT if the
  activity in question is a trade or business
  regularly carried on, and not substantially
  related to furthering the exempt purpose of the
  organization
• Exception to the General Rule Federal Credit
  Unions are U.S. instrumentalities (I.R.C.
  501(c)(1)) and not subject to UBIT

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Unrelated Business Income Tax (UBIT)

• In recent years, the IRS has issued 26 technical
  advice memoranda (TAM) and found that the income
  derived from the following activities are subject
  to UBIT
• Sale of Accidental Death and Dismemberment
  Insurance
• Sale of Credit Life Credit Disability Insurance
  
• Sale of Members Financial Management Services
• Nonmember ATM Fees
• Sale of Guarantee Auto Protection Insurance
• Sale of Group Life Insurance, Health Insurance,
  Dental Insurance and Cancer Insurance
• Sale of Car Warranties
• Car Buying Services
• Shared-branching arrangements, management
  services to other credit unions, certain CUSOs,
  and sales of financial management services
• Check sales, collateral protection insurance and
  interchange income are not subject to UBIT
• Outstanding litigation is challenging whether
  accidental death and disability insurance is
  subject to UBIT
• Another court found in favor of a credit union
  and held that revenue from the sale of credit
  life insurance, credit disability insurance and
  guaranteed asset protection (GAP) should not be
  taxed under UBIT

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INSIDE WASHINGTON A CREDIT UNION UPDATE
Allied Solutions Summer Networking Conference
Beaver Creek, Colorado August 31, 2009
Presented by Dan Berger Executive Vice
President, Government Affairs National
Association of Federal Credit Unions