CUNA Comment Letter

NCUA’s Proposed Rule Regarding Share Insurance Regulations (Part 745)

September 2, 2003

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

Dear Ms. Baker:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on NCUA’s proposed rule regarding changes to the share insurance regulations. The proposed rule clarifies how revocable trust accounts are established and insured, provides continuation of coverage following the death of a member and after the merger of credit unions for a limited period of time, and clarifies that there is coverage for Coverdell Education Savings Accounts. CUNA represents more than 90% of our nation’s 10,000 state and federal credit unions.

In developing these comments, we formed a taskforce to explore the issues raised by this proposal, which included the following individuals:

The work of the taskforce included not only several discussions among us but also included discussions with the Federal Deposit Insurance Corporation (FDIC) to learn more about their deposit insurance rules, which are very similar to NCUA’s rules. This also included a review of a number of forms used by credit unions when designating the types of accounts that are opened by their members. In addition to these efforts, we received a number of comments directly from credit unions and Leagues.

We also appreciate the efforts of Frank Kressman and Sheila Albin from NCUA’s Office of General Counsel. Their participation in our efforts was especially helpful in assisting the taskforce in understanding the intent and impact of this proposal.

Summary of CUNA’s Position

Revocable Trust Accounts

We are concerned about the provisions in the proposed rule with regard to revocable trust accounts, which are those accounts that evidence the owner’s intent to have funds in the account transferred to named beneficiaries at the time of the owner’s death. Unlike more complicated trusts, revocable trusts can be created at the credit union without a separate trust agreement.

The proposed rule is intended to clarify that the intent to establish such an account must be indicated in the title of the account by using commonly accepted terms such as, but not limited to, “in trust for,” “as trustee for,” or “payable on death to.” Acronyms of these terms may also be used. However, beneficiaries must be specifically named in the share account records of the credit union.

Our concern with these provisions is that they can be interpreted in a number of ways. The first issue that arises is whether it is the electronic records or the paper records that must contain the intention to designate a revocable trust account. Credit union electronic records often do not directly reflect that an account is a POD or similar account. To require that electronic records reflect such accounts would require significant data processing changes and staff retraining.

We recognize that the FDIC has similar rules with regard to establishing the intent to create a revocable trust account. We had the opportunity recently to speak with FDIC staff about this issue. We learned that FDIC does use electronic records when making deposit insurance determinations. However, the data processing systems that banks use appear to be different than those used by credit unions. Unlike credit unions, the bank records clearly indicate the title of the account, which allows FDIC to make its insurance determinations.

This is the reason these provisions requiring intent in the title of the account are not problematic for banks. However, it would be a problem for credit unions that have a different format for their electronic records. When we mentioned this difference to the FDIC staff, the response was that they would be prepared to accept paper records if the electronic records did not easily provide the information with regard to intent.

If it is agreed that the paper records are the ones that must reflect the intention to establish accounts, there is still a concern as to how these provisions will be interpreted. For example, they could be strictly interpreted to require that there be a specific title line on each account agreement in which there would be a term such as “payable on death to,” which could then be interpreted to mean that the names of the beneficiaries should also be on the title line as well. A more flexible interpretation would be that the term “POD” or other comparable term would just need to be noted somewhere in the account agreement and that the names of the beneficiaries would not have to follow this designation, but could be reflected elsewhere in the share account records.

In addition to the confusion as to how these provisions will be interpreted, the strict interpretation outlined above would be very problematic. Credit unions currently use a variety of forms when creating these accounts for members. These same forms are often used for other purposes, such as the membership application. Many of these forms currently do not have a specific title line in which the intention to establish a revocable trust account can be noted. In these situations, new forms would need to be developed and used in order to comply with these provisions of the proposed rule.

We believe requiring new forms would be unnecessary. Many of the forms currently in use allow credit unions to clearly indicate the intent to create a POD account, such as a “check-off” box that can be marked to indicate such intent, along with space on the form to indicate beneficiaries. A credit union or NCUA employee reviewing such a form will clearly understand whether there is the intention to create such an account. There is no need under these circumstances to also require that such intent be indicated in the “title.”

A rigid requirement that the type of account be noted in the account title could also lead to needless confusion and possible loss of insurance coverage. Credit union employees would certainly note the existence of a revocable trust account on the agreement but may neglect to note it on the title line, if there is one, but instead may note it somewhere else on the agreement, such as on a “check-off” box. This technical error would likely not be corrected by the member, since he or she would not be familiar with these requirements. This could, therefore, result in a loss of insurance coverage if the credit union fails and NCUA does not apply the insurance rules for revocable trust accounts as a result of this technical error.

Because of these concerns, we urge NCUA to interpret these provisions to allow credit unions with the flexibility to note the type of account on the agreement in a manner that is efficient for the credit union, as long as it is sufficiently clear enough for NCUA if there is ever a need to make an insurance determination in the event of a credit union failure. We also suggest clarification that this intent would not have to be reflected in the electronic records, as long as it is noted on the agreement, as well as clarification that the beneficiaries would not have to be named in the same place in which the type of account is noted, provided that the beneficiaries are noted elsewhere.

We also urge NCUA to postpone the mandatory compliance date with regard to these provisions on revocable trust accounts for at least one year. This delay is necessary in order to provide proper training for credit union staff with regard to these provisions and to make the necessary changes to the agreements, as well as to make the necessary changes to the data processing systems for those credit unions that need or want to reflect the intent on the electronic records.

This flexible approach should not impede NCUA in the event that it would need to make an insurance determination as a result of a credit union failure. Fortunately, credit union failures have traditionally been rare events and with regard to each failure, the number of accounts that exceed $100,000 that would require an analysis of whether there would be complete insurance coverage would likewise be rare. Therefore, the time that NCUA would save in making any such determinations by insisting that the type of account be noted in the account title should not be significant.

With regard to revocable trust accounts, the proposed rule will also clarify that it will treat the interests of the nonqualifying beneficiaries as funds of the owner even when the owner has not actually opened an individual account at the credit union. We support this clarification as the most reasonable approach, which is also consistent with the FDIC deposit insurance rules for banks and thrifts.

Insurance Coverage Following the Death of a Member

The death of a member can significantly change the amount of share insurance coverage, especially if that member has an interest in joint accounts, joint revocable trust accounts, or has a spouse that has his or her own individual account. The proposed rule will grant a six- month “grace period” after the member’s death to allow survivors an opportunity to restructure the accounts in order to maximize insurance coverage. This means the insurance coverage will not change during this six-month period, unless the accounts are restructured during this time by those who are authorized to do so. The grace period will not apply if the result would be less insurance coverage during this time period.

We support the creation of a six-month grace period following the death of a member that will provide surviving account owners time to restructure the accounts in order to maintain the amount of insurance coverage that was in place prior to the member’s death. During a time of grief, the survivors may not view the restructuring of a credit union account as a matter of high priority. The six-month grace period will allow survivors to tend to the most urgent matters without the need to worry about their insurance coverage. The FDIC incorporated this grace period in its insurance rules, and we agree that NCUA should do the same.

Insurance Coverage After the Merger of Insured Credit Unions

Currently, a member’s share account at a credit union is separately insured from other accounts that the member may own at other credit unions. This coverage may be jeopardized when credit unions merge. Under the proposed rule, members in this situation will have a six- month grace period after a credit union merger. During this time, the member will have the coverage that he or she had prior to the merger.

We support this proposal, as it will provide the affected members with time to restructure the accounts in order to maximize share insurance coverage. Both this proposal and the grace period when there is a death of a member help achieve NCUA’s stated goal of maintaining parity between the share insurance fund and the FDIC deposit insurance funds.

Coverdell Education Savings Accounts

In May 2000, Education Individual Retirement Accounts were specified as insurable as irrevocable trust accounts under NCUA’s share insurance rules. These accounts have now been replaced with Coverdell Education Savings Accounts. The proposed rule will reflect this change. We support this change, as it will minimize confusion with regard to the insurance of these types of accounts.

Thank you for the opportunity to comment on NCUA’s proposed rule regarding changes to the share insurance regulations. If Board members or agency staff have questions about our comments, please give Associate General Counsel Mary Dunn or me a call at 800/356-9655.


Jeffrey Bloch
Assistant General Counsel