Interchange Proposal Tops Regulatory Priorities

CUNA outlines top issues on the regulatory docket.

February 3, 2011

CUNA continues to address a number of key regulatory issues, including proposals from the Federal Reserve Board and Financial Accounting Standards Board (FASB), plus financial literacy requirements for directors and guidance on corporate credit unions and internet banking authentication.

Debit interchange proposal

CUNA President/CEO Bill Cheney says there’s no higher policy priority for CUNA at this time than to improve the “potentially horrendous” outcome under the Federal Reserve Board’s debit interchange proposal that will be inflicted on credit unions offering debit card programs if significant changes aren’t made.

CUNA’s Operation Comment has generated 3,600 letters from credit unions on this issue. “We’re grateful to the leagues and to credit unions for generating so many letters and for continuing to weigh-in with policy makers,” Cheney says. “In addition, I commend leagues that have organized their own interchange working groups.”

CUNA is preparing for the Feb. 17 hearing of the House Financial Services Committee’s Financial Institutions Subcommittee that addresses the Fed’s proposal and the debit card interchange amendment.

CUNA strongly urged this hearing and, along with leagues, is meeting with key legislators and staff to ensure they understand why the proposal and statute combine to disadvantage, not protect, credit unions and other small issuers.

FASB proposal

On a positive note, FASB reversed its position that the vast majority of financial assets and liabilities should be recorded at fair value. FASB issued an exposure draft in May 2010 that would greatly expand the use of fair value accounting for financial instruments.

The agency has reviewed the exposure draft’s proposed changes since the comment period ended last October, and the board members agreed to allow as an exception to the fair value requirement that loan products can be recorded at their amortized cost.

CUNA strongly supports FASB’s tentative decision, which expresses acknowledgement by the Board that fair value as a measurement approach is inappropriate for certain items, such as “simple plain vanilla instruments” that an entity does not actively trade but holds to maturity.

While this development is positive, other aspects of the financial instruments proposal, such as the requirement to fair value debt securities, are worrisome. CUNA will continue to work with FASB and its parent entity, the Financial Accounting Foundation, to ensure credit unions’ concerns are heard and hopefully to minimize the negative effects that the proposal would likely have on credit unions and other reporting entities.

Next: Financial literacy for directors

Financial literacy for directors

An NCUA Letter to Credit Unions is scheduled to be released soon by the agency on the financial literacy requirements of federal credit union (FCU) directors.

The NCUA Board approved a final rule at its December meeting that prescribes certain requirements for FCU directors, including requirements on financial literacy. CUNA urged NCUA to clarify the rule.

The agency intends for the letter to clarify the financial literacy requirements, which become effective July 2011, six months after publication of the final rule in the Federal Register.

The letter provides guidance on the following “base financial literacy requirements”:
1. Financial statements. A director should know what each line item means and its potential effect on the FCU;
2. Various risks to the FCU, such as credit, transactional, and reputational risks; and
3. Internal control mechanisms to control such risks.

NCUA’s Office of Small Credit Union Initiatives will offer free training workshops across the country and will make a training DVD available in May.

The level of necessary financial literacy depends on the size and complexity of the FCU.

Corporate CU guidance

NCUA issued a Corporate Credit Union Guidance Letter (No. 2011-01) regarding permissible activities for corporate credit union service organizations (CUSOs).

The letter addresses how corporate CUSOs may submit requests to NCUA for authorization of nonpreapproved business activities. Starting April 18, 2011, preapproved corporate CUSO business activities will generally be limited to brokerage and investment advisory services, plus other business activities the agency chooses to approve pursuant to a corporate CUSO’s request or the agency’s own initiative.

Letter No. 2011-01 follows an earlier Letter to Corporate Credit Unions (No. 2010-02) issued in December concerning corporate credit union compliance with NCUA’s revised corporate regulations. This letter also addressed corporate CUSOs to some degree.

In addition, Letter No. 2010-02 addressed corporate credit union capital, treatment of legacy assets held by corporates not in conservatorship or liquidation, net economic value standards, and corporate credit union chartering and mergers.

Internet banking authentication

CUNA expects further guidance from NCUA and the Federal Financial Institutions Examination Council (FFIEC) regarding authentication on internet and mobile transactions.

This guidance will update the FFIEC’s 2005 guidelines on internet banking authentication, which included authentication methods, risk assessment, and customer verification and awareness.

In addition, NCUA has indicated it will update its examination procedures on internet and mobile transaction risks later this year.