RegWatch - CUNA Marketing & Business Development Council
Regulatory Issues of Interest to CUNA Marketing & Business Development Council Members
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NEW ECONOMIC STABILIZATION STATUTE AND WHAT IT MEANS FOR CREDIT UNIONS
Last week, the President signed into law the new Emergency Economic Stabilization legislation. It is over 450 pages long and contains many provisions that do not impact credit unions directly. While CUNA is still reviewing the details of the legislation, here is initial summary.
CUNA worked very diligently as the legislation developed to ensure that credit unions' interests were protected to the fullest extent possible, given the circumstances. Of interest to credit unions, the legislation includes:
- A temporary increase in federal share insurance coverage to the same extent permitted for FDIC insured banks;
- Eligibility to sell assets under the troubled assets purchase program, if needed;
- Authorizes suspension of the mark-to-market accounting rules and a study on these standards;
- An immediate effective date for the payment of interest by the Federal Reserve on institutions' reserves posted on transaction accounts under Regulation D; and
- Several studies that we will need to monitor.
It is also important to note that the bill does not include provisions for modifications of mortgage loans under the bankruptcy process (although there are provisions for mortgage loan modifications for assets purchased by the Treasury).
This summary highlights those provisions that have significance for credit unions and includes guidance, which we have discussed with the National Credit Union Administration (NCUA), on what credit unions need to do with insurance signs and related issues in light of the temporary increase in the share and deposit insurance coverage. Following that, we have summarized other key provisions in the legislation for your general information. If you have questions about this information, you may contact Eric Richard, Ryan Donovan, or Mary Dunn at (202) 638-5777.
Insurance Coverage
- The new law raises the maximum insurance coverage for federally insured shares and deposits at credit unions and banks from $100,000 to $250,000 (the current $250,000 limit on Individual Retirement Accounts and other certain retirement accounts is not impacted by the new law). The provisions were added as a means to reinforce to consumers the safety of bank and credit union accounts in light of the financial crisis. It was also added in recognition of the Treasury's guarantee program for money market mutual funds held by uninsured financial companies.
- The increase in the coverage amount is effective upon enactment through December 31, 2009. (House Financial Services Committee Chairman Barney Frank (D-MA) has indicated he will hold hearings on this issue early next year and it may be very difficult for Congress to roll back the coverage level to $100,000.)
- The law precludes an insurance premium from credit unions or an adjustment to their 1% deposit to fund the additional coverage. This means that funding for the coverage will come from the National Credit Union Share Insurance Fund's operating funds or reserves.
- Also, if necessary, while the additional temporary coverage is in effect, NCUA may increase its borrowing from the U.S. Treasury to fund the coverage.
What Do Federally Insured Credit Unions Need to be Doing in Light of the Coverage Increase?
- Now that the President has signed the new legislation, credit unions will certainly want to let their members know that their funds are insured up to $250,000.
- NCUA plans to send information to credit unions on this issue shortly. In light of the legal requirement that credit unions must ensure that statements and advertising about federal insurance are accurate, CUNA is working closely with NCUA for federally insured credit unions to have flexibility in dealing with advertising of the increased insurance coverage.
- NCUA has already updated some of the downloadable signs available on its website, www.ncua.gov, that federally insured credit unions may use to reflect the new level.
- NCUA will also be coordinating with the Federal Deposit Insurance Corporation and may be providing stickers and/or new signs to federally insured credit unions.
- NCUA has also modified its insurance rules to parallel the changes that the FDIC announced last week for revocable trust accounts, often referred to as payable on death or living trust accounts. NCUA and FDIC are coordinating on how this change is affected by the new law. Here is the link to the change.
Mark-to-Market
- If the Securities and Exchange Commission (SEC) determines it is in the public's interest and to protect investors, it may suspend the application of Statement of Financial Accounting Standards No. 157 (“FAS 157”). These are the standards that have forced institutions to mark mortgage-backed securities and related investments to their current value in an unstable market.
- While the SEC does not supervise credit unions, it does oversee the Financial Accounting Standards Board, which determines Generally Accepted Accounting Principles (GAAP), that credit unions are required to follow.
- CUNA has talked with NCUA about this and will be coordinating with them on the application to credit unions of any suspension of the standards.
- The SEC would also be required, in consultation with the Federal Reserve and the Treasury, to conduct a study on mark-to-market accounting standards, including FAS 157's effects on financial institutions and bank failures.
Troubled Assets Relief Program (TARP)
- Any credit union that is contemplating selling eligible assets through this program is strongly encouraged to work with its league, other credit unions, others in the credit union system and NCUA to address its issues, including any liquidity needs.
- For purposes of information, here are the key provisions regarding the program. The Treasury Secretary is authorized to spend $700 billion to purchase troubled assets. The Secretary may use $250 billion immediately and may use up to $350 billion if the President submits a written certification to Congress. In order to use the full amount, the President must submit a report to Congress detailing the plan to use the funds, and Congress has the authority to disapprove the plan.
- Credit unions are included in the definition of “financial institutions” that are eligible to sell troubled assets to the U.S. Treasury under the new Troubled Assets Relief Program.
- Troubled assets include residential or commercial mortgages and other instruments “based on or related to” mortgages that have been originated or issued on or before March 14, 2008. The Secretary may also purchase “any other instrument” necessary to promote financial stability.
- Treasury must coordinate with the Federal Reserve Board, the Federal Reserve Bank of New York, the FDIC, the Comptroller of the Currency, the Office of Thrift Supervision, the Department of Housing and Urban Development, and NCUA, in implementing the program.
- Private institutions may be used as agents for the program.
- Treasury's implementation of these provisions is subject to review in court.
- Authority for the program ends 12/31/09, unless the Treasury certifies to Congress the need to extend it for another year.
- Institutions must provide warrants or debt instruments to Treasury that will help protect taxpayers against losses that may result from the program.
- When the TARP is established, the Treasury must also establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. Under this program, the Treasury must collect premiums for the guarantees from participating financial institutions sufficient to cover anticipated claims, and can vary the rates for the premiums based on credit risk.
- The premiums paid will go into a Troubled Assets Insurance Fund, which will consist of the premiums paid by participating institutions, and will be used to fulfill the obligations or guarantees provided to financial institutions.
- In five years, the President is required to submit to Congress a legislative proposal that recoups from the financial industry any projected losses to taxpayers.
Foreclosure Mitigation
- Treasury is required to implement a plan to maximize homeowner assistance and to encourage servicers of the underlying mortgages purchased through TARP to take advantage of the HOPE for Homeowners Program.
- Treasury may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.
- Treasury may consent to reasonable loan modification requests arising under existing investment contracts.
- The government is also directed to minimize foreclosures on properties underlying the mortgages and mortgage-backed securities the government purchases.
Payment of Interest on Federal Reserve Deposits
- The Monetary Control Act requires financial institutions, including covered credit unions, to post reserves on certain transaction accounts, under Regulation D. Under the Financial Services Regulatory Relief Act of 2006, the Federal Reserve is authorized to pay interest on these reserves beginning in 2011. The legislation allows the payment of interest to begin this month.
Reports
- Special Report on Regulatory Reform – the Oversight Panel (comprised of individuals appointed by Congress) must submit a report to Congress on regulatory reform no later than January 20, 2009, analyzing the current state of the regulatory system and its effectiveness at overseeing the participants in the financial system. CUNA will be weighing in on this report and on the one due in April mentioned below.
- Treasury must provide monthly reports to Congress on the troubled assets program, including expenditures and obligations.
- Treasury must also report to Congress on every $50 billion of assets purchased.
- By April 30, 2009, Treasury must provide a written Regulatory Modernization Report to Congress analyzing the current state of the market, evaluating the effectiveness of the regulatory system, and providing recommendations.
Executive Compensation
- If Treasury makes direct purchases of troubled assets from a financial institution and receives an equity or debt position in the institution, the Secretary will set executive compensation and corporate governance standards for that institution. The standards will only apply while the Secretary holds a debt or equity position in the institution.
- A “senior executive officer” is an individual who is one of the top 5 highly paid executives of a public company, whose compensation is required to be disclosed pursuant to the Securities Exchange Act of 1934, and non-public company counterparts.
- If Treasury purchases an institution's troubled assets through an auction and those purchases exceed $300 million (including direct purchases), any new contract with a senior executive officer that provides a golden parachute in the event of involuntary termination, bankruptcy filing, insolvency, or receivership is prohibited for the duration of the temporary assets program.
Summary of Other Provisions in the Legislation
- Requires any federal financial regulatory agency to cooperate with the FBI or other law enforcement agencies investigating fraud, misrepresentation and malfeasance with respect to development, advertising, and sale of financial products.
- Changes the tax treatment by financial institutions of gains and losses on the preferred stock of Freddie Mac and Fannie Mae.
- The annual tax deduction for corporate executive compensation is limited to $500,000 for compensation paid to the CEO, CFO or one of the other three highest compensated officers or employees from whom one or more troubled assets are acquired under the Act if the aggregate amount of such assets exceeds $300 million.
- The current tax treatment of the cancellation of mortgage debt for qualified principal residences is extended until January 1, 2013.
- The misuse of the FDIC logo, symbols or name to falsely advertise or misrepresent that deposits or shares are insured is prohibited. (CUNA discussed this provision with NCUA which feels the misuse of NCUA's logo, etc. is already sufficiently covered in other statutes.)
- Mary Dunn, SVP and Deputy General Counsel
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