RegWatch - CUNA OpSS Council

CUNA Regulatory Affairs (edited by the OpSS Council Regulatory Committee)
July 9, 2008 | COMMENTS

Regulatory Issues of Interest to CUNA OpSS Council Members

In This Issue:

• Chairman JoAnn Johnson’s Upcoming Departure from NCUA
• CUNA Comments on Proposed Revisions to CUSO Regulations
• CUNA Submits Comments in Response to FOIA/Privacy Act Proposal
• CUNA Comments on NCUA’s Proposed Changes to Its Advertising Requirements
• “Red-Flags” Examiner Guidance is Expected this Fall
• CUNA Comments on NACHA’s Stop Payment Proposal
• Fed Clarifies Liability Rules on Electronic Remotely Created Checks

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CHAIRMAN JOANN JOHNSON'S UPCOMING DEPARTURE FROM NCUA  

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

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

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

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

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

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

-  Mary Dunn, SVP and Deputy General Counsel

 

CUNA COMMENTS ON PROPOSED REVISIONS TO CUSO REGULATIONS

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

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

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

Click here for a copy of the letter.

-  Mary Dunn, SVP and Deputy General Counsel

 

CUNA SUBMITS COMMENTS IN RESPONSE TO FOIA/PRIVACY ACT PROPOSAL

CUNA recently submitted a comment letter to the National Credit Union Administration (NCUA) in response to a recent proposal that will make a number of changes in how the public may access agency information under the Freedom of Information Act (FOIA), as well as changes to the rules regarding the Privacy Act, which safeguards certain personal information of individuals that is collected by federal agencies.

For the FOIA rules, the NCUA Board proposes changes to facilitate submissions of FOIA requests, how requests must be addressed, and the information that must be included in the request. This implements provisions of the OPEN Government Act of 1997, which clarifies that the processing time for FOIA requests begins no later than ten days after first received by any agency-designated FOIA information center. The proposal also identifies NCUA's information centers.

For the Privacy Act rules, the proposal includes a number of technical changes and clarifies that requests must be submitted in writing to specified staff and the nature of the request must be on the envelope and letter. Telephone requests will no longer be permitted.

In our comment letter, CUNA indicated no significant concerns with regard to the proposal, as it will directly impact requests submitted to NCUA, with little impact on credit unions. However, CUNA did suggest that individuals be permitted to submit requests under the Privacy Act electronically, as they are permitted to do under FOIA.

Click here for a copy of the letter.

- Jeff Bloch, Senior Assistant General Counsel

 

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

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

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

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

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

- Luke Martone, Regulatory Research Counsel

 

“RED-FLAGS” EXAMINER GUIDANCE IS EXPECTED THIS FALL

NCUA and other federal financial institution regulators are expected to issue guidance by this fall that is designed to help examiners as they review compliance with the identity theft “red-flags” rules and guidelines that were issued this past November, as required under the Fair and Accurate Credit Transactions (FACT) Act. The rules require financial institutions and other creditors to develop and implement a written program that is designed to detect, prevent, and mitigate identity theft. The guidelines that were issued with the rules are intended to assist financial institutions and creditors in developing this program, and they also outline a number of “red flags” that may indicate identify theft.

The rules issued by NCUA will apply to federally-chartered credit unions, and the rules issued by the Federal Trade Commission (FTC) will apply to state-chartered credit unions, although they are essentially the same. The FTC is also one of the agencies involved in developing the new examiner guidance.

Credit unions and others have until November 1 st to comply with these new FACT Act requirements, and it is expected that the regulators will issue the examiner guidance prior to this mandatory compliance date. Click here for more information about the rules and guidelines that were issued last year.

-   Jeff Bloch, Senior Assistant General Counsel

 

CUNA COMMENTS ON NACHA'S STOP PAYMENT PROPOSAL

In its comment letter, CUNA fully supports NACHA's proposed amendments regarding stop payment authorizations. The proposal is intended to align NACHA's rules with the Federal Reserve Board's official staff commentary on stop payments of pre-authorized electronic debits.

Currently, NACHA Operating Rules (Rules) allow a consumer receiving ACH debits to place a stop payment order on a single debit entry, similar to the way a stop payment order can be placed on a particular check in the check collection system. An ACH stop payment order remains in effect for (1) six months, (2) until the debit entry has been stopped, or (3) until the Receiver withdraws the stop payment order, whichever occurs first. A Receiver wishing to stop all debits from a specific Originator must revoke that Originator's authorization.

The Rules are inconsistent with the Federal Reserve Board's official staff commentary on Regulation E. The commentary states that a consumer's right to stop payment of preauthorized electronic debits applies to all future debits from a specific Originator if that is the consumer's intent and that a financial institution may not wait for the Originator to cease origination of the debits.

We believe these amendments would enable a receiving depository financial institution (RDFI) to better reconcile its obligations under both the Rules and Regulation E. Further, permitting an RDFI to require a copy of the Receiver's correspondence with the Originator regarding the revocation of authorization would help the RDFI better understand the Receiver's intent when receiving an ACH stop payment request.

Click here for a copy of CUNA's comment letter.

-  Lilly Thomas, Assistant General Counsel

 

FED CLARIFIES LIABILITY RULES ON ELECTRONIC REMOTELY CREATED CHECKS

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

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

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

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

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

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

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

-   Lilly Thomas, Assistant General Counsel