CUNA Comment Letter

Economic Growth and Regulatory Paperwork Reduction Act

May 12, 2005

Ms. Mary Rupp
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

Re:   Economic Growth and Regulatory Paperwork Reduction Act        (EGRPRA)

Dear Ms. Rupp:

The Credit Union National Association (CUNA) is pleased to respond to the National Credit Union Administration (NCUA) Board’s request for comments to identify outdated, unnecessary, or burdensome regulatory requirements imposed on federally insured credit unions. By way of background, CUNA is the largest credit union trade association, representing approximately 90% of our nation’s nearly 9,300 state and federal credit unions.

NCUA and other federal financial institution regulators are required by a 1996 paperwork reduction law, the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA), to review their regulations at least once every ten years. EGRPRA requires the NCUA and the other regulators to categorize the regulations, publish the categories for public comment, report to Congress on any significant issues raised by the comments, and eliminate unnecessary regulations.

Under EGRPRA, NCUA will request comments until 2006 on categories of regulations that impose burden on federally-insured credit unions. At this time, NCUA is requesting comments in two regulatory categories, Safety and Soundness and Anti-Money Laundering, and is also seeking input on its regulations on lending, investments, appraisals, safeguarding member information, and other areas.

General Comments

We applaud the NCUA Board for its ongoing efforts to enhance the credit union charter and to minimize regulatory burdens within the confines of safety and soundness for well-managed credit unions. We also want to acknowledge NCUA’s ongoing efforts, separate from the requirements of EGRPRA, to review all of its existing rules every three years, including the review of the Reg- Flex regulation.

Currently, the Credit Union Regulatory Improvement Act is poised for reintroduction in Congress. It contains a number of regulatory improvements that CUNA wholeheartedly endorses and has worked diligently to accomplish. We appreciate NCUA’s efforts to play a leading role on CURIA as well.

Central to CURIA is NCUA’s legislative proposal to revamp prompt corrective action. The agency’s leadership on this issue has been outstanding, and we appreciate the opportunity to work with NCUA, Treasury and Congress on this most significant endeavor.

Guidelines for Safeguarding Member Information

As you know, under the Gramm-Leach-Bliley Act, credit unions and other financial institutions are required to establish and implement procedures to safeguard members’ personal information in an effort to protect members from identity theft and other breaches of security.

While credit unions and other financial institutions must comply with such procedures, recent far-reaching incidents of identity theft involving companies such as B.J.’s Wholesale Co. in Massachusetts have revealed serious gaps in the protection of consumers’ financial and personal information. Such breaches may have a financial impact on entities such as credit unions that have issued the credit or debit cards from which personal information has been transferred and not properly protected by merchants or others. Also, when there is a breach, consumers often turn to their credit union or other card issuing financial institution to help them recover losses and/or insulate themselves from further compromises. Presently, about 4,600 credit unions issue credit or debit cards.

Issues involving such compromises are complicated. They include concerns about inadequate notice of security breaches to consumers and financial institutions, as well as cumbersome procedures financial institutions may be subjected to when seeking to address losses.

Given the nature of these concerns, we believe it is highly appropriate for NCUA to work with CUNA and Congress to support efforts to improve the process for securing data when consumers utilize credit and debit cards and for notifying consumers as well as institutions when problems have occurred.

Currently, Congress through hearings and pending legislation is considering what steps could be taken to protect consumers and others from security breaches relating to personal and financial information. We urge NCUA to weigh-in and support measures that will help prevent breaches and protect consumers and credit unions from further losses if such lapses occur.

Loans to Members and Lines of Credit to Members

The Credit Union Regulatory Improvements Act, when adopted, will result in a number of changes to the statutory and regulatory framework surrounding credit union activities.

One of the amendments would increase the 12-year loan maturity limit in the FCU Act, which we strongly support. Also, as provided in CURIA, NCUA should have greater flexibility to adjust the usury ceiling, which among other things, would make it easier for federal credit unions to serve the underserved.

Member Business Loans (MBLs)

CUNA would like to comment on member business lending separately. We commend NCUA for continuing its efforts to promote business lending by credit unions under safe and sound regulatory conditions, including the agency’s rule changes since 2003 to approve a number of amendments to Section 723, governing member business loans (MBLs).

We have sought changes in the FCU Act regarding member business loans since 1998. While we continue to advocate such legislative amendments, we believe further improvements to the MBL rules could be adopted by the NCUA Board to make member business lending more attractive and feasible for all types of credit unions.

Under Section 723, credit unions may apply for and obtain waivers from a number of regulatory requirements that apply to MBLs. These include appraisal requirements, aggregate construction and development loan limits, minimum borrower equity requirements for certain loans, loan to value requirements; and others. We urge NCUA to consider whether these issues are more in the nature of business judgment issues and could be addressed in a credit union’s member business loan policy approved by its Board, rather than detailed in regulations.

Alternatively, a Reg-Flex credit union does not have to obtain the personal guarantee of an MBL borrower, and we believe NCUA should reconsider whether this flexibility could be expanded to all adequately capitalized credit unions. For other MBL provisions subject to waiver, the Board should consider whether Reg-Flex credit unions could avoid other requirements currently subject to waiver without having to go through the waiver process.

One of the key amendments of CURIA would raise the MBL limit from 12.25% to 20% of assets. We believe credit unions should not be forced to operate with more restrictive MBL limits than those applicable to institutions such as thrifts. Another amendment would change the definition of MBLs to exclude loans of under $100,000 from the limits on MBLs. CUNA strongly supports these and other changes in CURIA that will enhance lending for credit unions.

Appraisal Standards

Currently, federally related real estate transactions of $250,000 or more must meet NCUA’s appraisal requirements, although appraisal requirements for MBLs may be waived. We believe this threshold should be reviewed and consideration given to increasing the threshold to a higher level. Such a change would minimize regulatory burden without undermining the objectives of the statutory requirements of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

Anti-Money Laundering and Bank Secrecy Act - Reports of Crimes or Suspected Crimes (12 C.F.R. 748.1(c))

CUNA supports laws that prevent and deter money laundering as long as the requirements that fall on credit union are reasonable and cost-effective. However, reporting crimes or suspected crimes under the Bank Secrecy Act has become a complex and complicated process. Credit unions must file various forms based on the types of transactions in which they engage and there is confusion among the various regulations with which they must comply, including regulations under the Treasury Department and guidance issued by FinCEN.

There have been improvements to reduce the regulatory burdens placed on financial institutions that result from BSA and related requirements. For example, credit unions and other financial institutions were previously required to file multiple copies of Criminal Referral Forms with their respective federal regulators and law enforcement agencies. Regulations adopted in the mid-1990s consolidated the filings to one form, titled “Suspicious Activity Report” sent to one government agency – FinCEN, which compiles the information into a single database and distributes it accordingly. Additionally, FinCEN recently issued guidance that did not require a financial institution to file a separate SAR when it filed a blocked transaction with OFAC in limited circumstances. These are positive developments.

Nonetheless, there are additional changes that could be made to reduce the burden of BSA and related requirements, without jeopardizing their objectives.

We believe the threshold for filing a currency transaction report as well as the time period in which an institution must file the CTR should be reviewed. The current $10,000 reporting threshold was enacted decades ago, and a review of the appropriate level for this threshold is overdue. Raising the level to $20,000 or higher, we feel, would be appropriate. This action would also have a direct effect on reducing the number of Suspicious Activity Reports (SARs) that are filed since credit unions must file an SAR when transactions are “structured” in amounts slightly below the CTR threshold. Increasing the reporting threshold to an amount more applicable to today’s inflation rate would reduce burdens on credit unions while more efficiently help in the fight against money laundering and fraud.

We also think that allowing institutions up to 30 days to file the CTR would help limit the burden of compliance.

In addition, currently credit unions must monitor and report on accounts for suspicious activity; currency transactions in excess of a certain threshold amount, OFAC blocked transactions; FinCEN’s 314(a) lists; and the BSA exemption list. Credit unions must also obtain and retain additional information when completing a transaction in cash that includes: wire transfers, selling drafts, cashiers checks money orders, and travelers checks.

Combining such lists and reports would streamline the information and ensure consistency in enforcement and among the various agencies.

We believe that the reporting requirements for suspicious activity could be improved by providing additional guidance to credit unions. The broad, far-reaching and general standards of when to file an SAR, coupled with the strict, low-tolerance emphasis on BSA compliance puts credit unions in a difficult position of second-guessing their decision on whether to file. Filing suspicious activity reports has become a catch-all defense for credit unions to avoid strict penalties for failing to report.

Additional guidance as part of official staff commentary that includes examples of when to – and when not to – file an SAR would provide credit unions with consistent guidance for filing.

Unlike other financial institutions regulated by the Federal Reserve System, Office of Thrift Supervision, or the Federal Deposit Insurance Corporation, a credit union’s officers and employees must annually report on financial accounts over which they have signature authority that are held in a foreign country and that have an aggregate value over $10,000. The basis for excluding credit unions from the exemption appears to be that while institutions regulated by the other agencies maintain many foreign bank accounts, only a few credit unions do and it should not be as burdensome for credit unions to complete this form. We do not agree with these assumptions and believe that credit unions should be granted an exemption equal to that of other financial institutions regardless of the number of foreign accounts they hold.

We also believe that additional guidance as to what constitutes an appropriate anti-money laundering compliance program would help ensure credit unions do not engage in unnecessary and burdensome procedures. Currently, the Section 748.2 of NCUA regulations require training and independent testing. However, credit unions are unclear as to what level of testing is adequate and what training is appropriate. Additional information in the Appendix to Part 748 would provide guidance to credit unions as to the amount of testing and training that would be adequate based on different risk levels in the credit union.

Records Preservation Program and Record Retention Index

In 2001, NCUA made important improvements in this regulation. However, agency guidance on an issue relating to records preservation would be useful. When a credit union merges with another credit union, the surviving credit union maintains both credit unions’ records. We believe that additional direction would be helpful for the surviving credit union to determine which records from the merged credit union should be retained permanently or periodically destroyed.

Investment and Deposit Activities

Flexible investment authority for FCUs is critical to their ability to serve their members and meet the demands of a changing financial marketplace. In that connection, credit unions have identified restricted investment activities as an impediment they believe should be addressed, recognizing that the Federal Credit Union Act is very specific regarding powers and limitations as they relate to investments.

However, we believe there are measures NCUA could take, short of statutory changes, to enhance investment activities. In 2003, NCUA made several changes to its regulations to afford Reg-Flex credit unions additional latitude when making certain investments.

We encourage NCUA to consider whether all adequately capitalized credit unions, not just those with Reg-Flex status, could be eligible for additional investment flexibility.

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In closing, we appreciate the opportunity to provide these comments to you in an effort to assist the agency in its regulatory review under EGRPRA, and we look forward to continuing to work with NCUA to help pursue additional regulatory improvements to enhance the credit union charter.

Sincerely,

Mary Mitchell Dunn
CUNA SVP and Associate General Counsel