Compliance Matters

August 1, 2010


Garnishments and Federal Benefits

Led by the Treasury Department and the Social Security Administration, federal agencies that make benefit payments have proposed regulations to address how credit unions and other financial institutions are to handle state garnishment orders. The Credit Union National Association (CUNA) expects final regulations to be adopted in coming months, effective in 2011.

Federal law prohibits Social Security, federal retirement, veterans, and other payments from being subject to state court orders garnishing funds in an individual’s account to pay a creditor. Currently, financial institutions often place a temporary freeze on the account, and state laws allow the account­holder to seek a court exemption from turning over those funds that are federal benefit payments.

The agencies have decided that “technology and debt collection practices have led to an increase in the freezing of accounts containing federal benefit payments,” and that freezing federal benefits is too much of a hardship on recipients. Therefore, they’ve proposed rules to require a financial institution that receives a garnishment order to determine whether any federal benefit payments were electronically deposited into the account during the past 60 days. The proposed rules would prohibit freezing an amount equal to the sum of such payments or the balance in the account at the time of the garnishment order, whichever is lower.

The federal agencies recognize that financial institutions are currently put in a difficult position, since they’re required by law to comply with garnishment orders and they can have difficulties in identifying accounts that contain federal benefit payments. The proposal intends to create “straightforward, uniform procedures for financial institutions to follow” that define their duties, establish a mechanism to better identify federal payments, and “minimize the hardships encountered by federal benefit payment recipients whose accounts are frozen pursuant to a garnishment order.”

While supporting the purpose of the proposed rule, CUNA has suggested several operational changes, and notes credit unions will need adequate lead time to put procedures and data processing changes into place to implement the new requirements.

While this rule, when finalized, will only apply to direct-deposit federal benefits—not to paper checks—the Treasury Department has separately issued a proposed plan that all federal payments, other than those made by the Internal Revenue Service, will be delivered either by electronic direct deposits or via debit cards by March 2013.


UIGEA Exam Guidelines

The National Credit Union Administration (NCUA) issued Regulatory Alert No. 10-RA-08 earlier this summer. The alert provides an overview of the Unlawful Internet Gambling Enforcement Act (UIGEA) regulations as well as interagency guidance developed for reviewing credit unions’ compliance with these new requirements. Credit unions were required to comply with the UIGEA regulations start­ing June 1, 2010.

UIGEA compliance examinations will be risk-focused. Examiners will take a look at appropriate risk factors, such as the number of commercial accounts the credit union maintains for Internet gambling businesses. If the credit union isn’t using the safe harbor policies and procedures set forth in the rule, examiners will determine whether the policies and procedures adopted are reasonably designed to identify and block or otherwise prevent restricted transactions.

Examiners will review other audit reports that assess the credit union’s UIGEA compliance and determine which position in the institution is responsible for UIGEA compliance. The regulatory alert spells out other examiner procedures, and can be found on
NCUA’s website (


Community FCU Charter Changes

The NCUA Board has amended its field of membership (FOM) and chartering policies for community federal credit unions. The agency has established “objective and quantifiable criteria” to determine the existence of a “local” community and to define for the first time “rural district,terms found in the Federal Credit Union Act.

Under the new rule, a federal credit union will qualify to serve a well-defined local community (WDLC) in one of the following three ways:

  • A single political jurisdiction. This is an area less than an entire state that is recognized as a single political jurisdiction, as permitted under the existing FOM rules;
  • A statistical area. Estab­lished by the federal Office of Management and Budget(OMB) for census-related purposes, this area must be a recognized core-based statistical area (CBSA). Or in the case of a CBSA with “metropolitan divisions,” the area is a single metropolitan division (or part of the area). CBSA is an OMB term to include a county or counties associated with at least one urbanized area of at least 10,000 in population, plus adjacent counties that have commuting ties with the core. For the purpose of the new FOM rules, the area must have a population of 2.5 million or less.
  • A grandfathered WDLC. Future applicants can seek to serve the exact same geographic area of community FOMs approved before the July 26 effective date.

An area may qualify as a “rural district” under the law by satisfying either one of these two new definitions:

  •  It has well-defined, contiguous geographic boundaries; more than 50% of the district’s population resides in census blocks or other geographic areas that the Census Bureau designates as rural; and the total population of the district doesn’t exceed 200,000 people.
  • It has well-defined, contiguous geographic boundaries; the area doesn’t have a population density in excess of 100 people per square mile; and the total population of the district doesn’t exceed 200,000 people.

To obtain a community charter or expansion, the federal credit union must demonstrate through its marketing and business plans that it can serve the WDLC or rural district.

These plans must include information on how the credit union will market its services, particularly to underserved groups; which community-based organizations it will use for outreach efforts; marketing budget plans; and timetables for implementation.

NCUA has made clear that the appropriate regional office will specifically review the credit union’s actions every year for three years after the community charter or expansion has been approved to assess whether the credit union is satisfying its implementation plans, while recognizing that plans may have to be revised. The agency also said it may pursue supervisory action if the credit union fails to take promised actions. Find NCUA’s FOM policies in its Chartering and Field of Membership Manual, available at