The NCUA is proposing to amend three subsections of its lending rule to incorporate legal interpretations previously issued by its Office of General Counsel (OGC) regarding permissible maturities for certain types of loans and the effect of partial government guarantees. The proposal clarifies:

• the conditions for applying the lending rule to loans secured by mobile homes, recreational vehicles, house trailers and boats;
• that loans secured by manufactured homes may be considered residential real estate loans; and
• that loans with a partial government guarantee, insurance, or advance commitment to purchase a portion of a loan fall within the rule.

The objective of the proposal is to make things easier by incorporating these interpretations into the rule itself rather than having them stated separately in OGC legal opinions. Comments are due by January 25, 2005.

The NCUA, acting in response to concerns that credit union members may not fully understand the implications of conversion to mutual savings banks (MSBs), has issued a final rule to outline requirements related to these conversions. The final rule, available at 70 FR 4005, builds on previous rulemaking issued in February 2004 and a proposed rule published in August 2004.

The amendments to the rules regarding conversion of insured credit unions to MSBs require a converting credit union to:

• provide members with additional disclosures in a prominent place about the conversion prior to conducting a member vote (a sample of the required disclosures appears in the newly-amended 12 CFR part 708a.4(e));
• conduct a "fair and legal" vote by secret ballot using an independent entity; and
• provide the NCUA with conversion-related information about the law of the state where the credit union is chartered.

The final rule became effective January 28, 2005.

In March the House Committee on Financial Services approved legislation to amend the Federal Credit Union Act (FCUA). Since that time, it has been amended and approved by the House, received by the Senate and referred to the Senate Committee on Banking Housing and Urban Affairs. The goal of the amendment is to allow unbanked persons to receive certain services from federal credit unions if they are within the credit union's field of membership. The bill, titled the "Expanded Access to Financial Services Act of 2005," H.R. 749, aims to expand access to federal credit unions' money order, check cashing and money transfer services for nonmembers.

Recently, the law firm has been given to understand that there will be an increased emphasis on Bank Secrecy Act (BSA) compliance in examinations of credit unions. In response to recent cases involving the failure to monitor suspicious financial transactions, Congress has encouraged FinCEN and the federal banking agencies, including the National Credit Union Administration, to crack down on BSA compliance. While this is not news to banks, state and federal credit unions may be surprised to hear what's in store for upcoming examinations. Specifically, we've learned that examiners will be focusing on Suspicious Activity Report (SAR) filing and Customer Information Program (CIP) compliance. In addition, training for employees and board members in the area of BSA may be more closely monitored.

In a recent speech, NCUA Chairman JoAnn Johnson recommended that federal credit unions evaluate corporate governance and auditing practices. Although the Sarbanes-Oxley Act does not specifically apply to federal credit unions, Chairman Johnson encouraged credit unions to consider the provisions of the Act dealing with accounting, auditor independence, corporate responsibility and enhanced financial disclosures. Information regarding Sarbanes-Oxley and sound corporate governance practices can be found on the NCUA website at www.ncua.gov, or contact the firm's Corporate Practice Group.

On May 2, 2005, the National Credit Union Administration (NCUA) issued its version of the final Guidance entitled "Security Program and Appendix B - Guidance on Response Programs for Unauthorized Access to Member Information and Member Notice." The NCUA's Guidance, by its own terms, is substantially identical to the guidelines issued in March of this year by the federal banking agencies. However, as Section 39 of the Federal Deposit Insurance Act does not apply to the NCUA, the NCUA Board determined that issuing its own Guidance separately would limit confusion as to the Guidance's applicability to federally insured credit unions. For more information, see Bankers' Compliance Group Handout #05-05B New Guidance on Response Programs for Information Security Breaches.

The NCUA has issued a Risk Alert targeted specifically at federal credit unions engaged in specialized lending activities such as third-party subprime indirect automobile lending and participations. The Risk Alert was prompted by a sharp increase in this type of lending, which in turn has created a heightened concern that credit unions may not have effective controls and monitoring systems in place to address the risk involved. As a result, examiners will be contacting credit unions engaging in these activities to discuss the issues outlined in the Risk Alert and determine whether appropriate actions are being taken to address any identified concerns. If necessary, on-site supervision contacts may be conducted to evaluate a credit union's progress in reaching appropriate due diligence standards.

The Risk Alert states that if a credit union allows outsourcing of underwriting, servicing, repossession or insurance processing to a third-party vendor then the need for adequate control measures reaches even higher levels of importance. At a minimum, to ensure sound business practices the NCUA advises credit unions to do the following:

• Regularly analyze the program's impact on the credit union's net worth;
• Properly evaluate and oversee any thirdparty vendor's subprime underwriting criteria;
• Limit any third-party vendor's authority to alter loan terms;
• Test the accuracy of any third-party vendor's reports, and if appropriate; and
• Include an exit clause in any third-party vendor's servicing agreement.

The Risk Alert provides greater detail as to how each of the above corrective actions may be accomplished. Other actions may be required as well. The Risk Alert may be accessed at www.ncua.gov/letters/RiskAlert/2005/05-Risk-01.pdf. For any questions on subprime lending contact the Consumer Practice Group.