Last month the NCUA Board approved a measure to simplify the Form 5300 Call Report used by all federally-insured credit unions (and required by 12 CFR 741.6). Revised Form 5300 consolidates information, reduces the number of schedules and is designed to be easier to read and use. Prior to these amendments, credit unions under $10 million in assets had the option of filing a short form version of the call report (Form 5300SF) at the end of the first and third quarters. The NCUA's revisions require smaller credit unions (those with less than $10 million in assets) to begin using new Form 5300 for third quarter data this year and eliminate Form 5300SF. Credit unions with assets of $10 million or more will use new Form 5300 beginning with the second quarter filing. The NCUA emphasized the importance of a uniform call report to ensure consistency in reporting requirements.

The NCUA has modified the eligibility requirements for its Regulatory Flexibility Program (RegFlex) by, among other things, reducing the minimum net worth to qualify for the program. RegFlex exempts qualified credit unions from onerous regulatory restrictions, including the following: (1) the conditions on making charitable contributions; (2) the limit on nonmember deposits; (3) the limit on fixed assets; (4) guarantee requirements for member business loans; (5) the limit on investment-related activities over which discretionary control may be delegated; and (6) the range of loans a credit union may purchase.

Under the current rule (12 CFR 742), a credit union must have a composite CAMEL rating of "1" or "2" for two consecutive examination cycles and a net worth ratio of nine percent (200 basis points above the net worth ratio to be classified as "well capitalized" under Prompt Corrective Action) for a single quarter to automatically qualify for RegFlex. Credit unions with a CAMEL rating of "3" or higher may apply to their regional director, on the basis of sufficient net worth alone, for a RegFlex designation.

Effective February 26, 2006, the final rule (71 FR 4035) adopted the following changes:

• Reduces the minimum qualifying net worth for RegFlex to the "well capitalized" net worth category of seven percent (as opposed to nine percent);
• Requires that a credit union maintain the seven percent net worth for a six-quarter duration to remain eligible for the benefits of RegFlex (instead of one quarter); and
• Eliminates the requirement that NCUA notify credit unions that automatically qualify for RegFlex (but retains the requirement to notify a credit union that applies for a RegFlex designation if it is granted or denied).

For more information about RegFlex or the final rule, please refer to the NCUA's website at www.ncua.gov or contact the law firm.

In December 2005 the NCUA issued its final rule on the purchase of assets and assumption of liabilities by federally-insured credit unions (FICUs) in order to clarify which transfers of assets or accounts require approval by the NCUA Board. Transactions involving the sale or purchase of loans or other assets between FICUs do not require NCUA approval. NCUA notes that other regulations may limit or otherwise regulate those transactions, for example, the member business lending rule, the fixed asset rule, the eligible obligations rule, and so forth. For those transactions that do require approval, this rule describes how an FICU should apply for approval. This rule became effective in January 2006.

In compliance with the Truth in Savings Act (TISA), the NCUA has recently adopted a final rule substantially similar to the Federal Reserve's May 2005 rule requiring banks to make certain disclosures when they offer or promote courtesy overdraft protection services to consumers. The new rule creates a new section under the NCUA's Truth in Savings (TIS) rule (Part 707). The NCUA rule is similar to the rules in Regulation DD but is not identical.

Credit unions who offer courtesy overdraft protection, but do not advertise it, must disclose fees debited from a share account on a periodic statement. Credit unions that advertise courtesy overdraft protection are required to separately disclose the total fees charged to an account for paying an item when there are NSFs and the fees that are imposed for returning items unpaid. A credit union that does not offer courtesy overdraft protection and does not advertise the payment of overdrafts is not required to provide the new periodic statement disclosures.

The NCUA appears to have adopted a more liberal approach than the banking agencies on this point. For banks and savings associations subject to Regulation DD, all institutions (not just promoters) must break out fees for paying NSF items separately from the fees charged for returning such items. Refer to BCG Handout #05-9A, "New Overdraft Protection Plan Rules in Regulation DD" (September 2005).

In addition, for new members, all credit unions that offer courtesy overdraft protection must specify in account-opening disclosures the categories of transactions for which an overdraft fee may be imposed. An exhaustive list is not required.

Credit unions should be aware that the interim rule became effective December 8, 2005; however, the mandatory compliance date for the final rule has been extended from July 1, 2006 to October 1, 2006.

In April, the NCUA released an IT Security Compliance Guide to assist credit unions in their compliance with the Interagency Guidelines Establishing Information Security Standards (NCUA Rules & Regulations, Part 748, Appendix A and B). Specifically, the guide provides information with respect to Part 748, Appendix A; Guidelines for Safeguarding Member Information, and Appendix B; Guidance on Response Programs for Unauthorized Access to Member Information and Member Notice.

The guide summarizes the responsibilities of credit unions to ensure the security, confidentiality, integrity and proper disposal of information. The FAQs accomplish this by illustrating how certain provisions of the Rules and Regulations apply to specific instances of threats to security. Some areas discussed include:

• Developing and implementing an information security program;
• Suggestions on designing security controls;
• Overseeing service providers; and
• Effectively training staff

In addition, the appendix to the guide lists resources that may be helpful in assessing risks and designing and implementing information security programs. Although the guide's purpose is to assist credit unions identify and comply with the requirements of the Security Guidelines, it is not a substitute for the Security Guidelines themselves. If you have specific questions, please contact the Operations Practice Group.

Unique among federal "banking" charters federal credit unions may not change interest at a rate higher than 15% unless allowed by their regulator. The NCUA has published a final rule setting forth the criteria the NCUA Board considers in setting a permissible interest rate exceeding 15 percent and to establish procedures regarding publication of its determination. The amendment simplifies the means for notifying federal credit unions of any increase in the interest rate ceiling rather than issuing an amendment to the regulation every 18 months as it has previously done. This final rule became effective September 9, 2006.

This new procedure for providing notice to federal credit unions regarding the Board's determination on the permissible interest rate parallels the NCUA Board's long-standing procedure in providing notice of the annual operating fee charged to federal credit unions. The NCUA Board will notify federal credit unions of an increase in the interest rate ceiling through official NCUA publications and the media, primarily through a Letter to Federal Credit Unions. Interested persons may obtain copies of the Letters from the NCUA website or by contacting the NCUA Publications Office. Federal credit unions will usually receive notice of an adjustment within two to three days of the Board's determination through these methods.

The NCUA has issued a final rule to regulate purchases by federally insured credit unions of indirect vehicle loans serviced by third-parties. The rule limits the aggregate amount of these loans serviced by any single third-party to a percentage of the credit union's net worth. The rule, which becomes effective July 28, 2006, ensures that federally insured credit unions do not undertake undue risk with these purchases.

In December 2005, the Board issued for public comment a proposed rule establishing concentration limits for indirect automobile loans and loan participations serviced by third-party servicers. 70 FR 75753 (Dec. 21, 2005). As stated in the preamble to the proposed rule, the NCUA Board is concerned some credit unions may involve themselves in indirect, outsourced programs--meaning programs in which a third party manages a credit union's relationship with automobile dealers and, because the third party handles loan servicing, with the credit union's members as well--without undertaking adequate due diligence, implementing appropriate controls, and having sufficient experience with a third party servicer.

The Board proposed to limit the aggregate amount of outsourced loans and participations a credit union may purchase from any one servicer to 50 percent of the credit union's net worth. After 30 months of experience with a particular servicer, the limit increases to 100 percent of net worth. The proposal exempted federally-insured depositories and their wholly-owned subsidiaries from the definition of servicer. The proposal also included a process for a credit union to request a waiver from the concentration limits from its regional director.

The final rule (71 FR 36661, June 28, 2006) retains the concentration limits, the servicer exemptions, and the waiver provision as proposed but, in response to public comments, the Board made certain changes. The final rule includes an additional exemption for certain credit union service organization (CUSO) servicers and excludes loans in which the servicer and its affiliates were not involved in the origination process from the concentration limits. These changes, while not affecting the rule's substantive and procedural rationales, do narrow the rule's scope and impact. The final rule also includes a 45-day time period for a regional director to act on waiver requests and provides for an appeal to the NCUA Board.

Effective October 26, 2006, the NCUA issued a final rule amending the share insurance provisions of the Federal Credit Union Act (FCU Act).  The final rule follows the issuance of the interim final rule which became effective April 1, 2006.  The provisions of the final rule coincide with the Federal Deposit Insurance Reform Act of 2005.  The FDIC published its interim final rule on March 23, 2006 (and it’s almost identical to the NCUA’s interim final rule), and its final rule on September 12, 2006 (71 FR 53547).

For the most part, the final rule mirrors the provisions of the interim final rule.  First, the final rule increases federal share insurance coverage for certain retirement accounts to $250,000.  Before 2010, the NCUA and FDIC will have to coordinate their efforts to consider whether to index the current $100,000 “standard maximum share insurance amount” (SMSIA, which applies to credit unions) and the $100,000 “standard maximum deposit insurance amount” (SMDIA, the FDIC equivalent), as well as the new $250,000 limit for IRAs and Keoghs, to inflation. The first increase could occur in 2011, and the process could be repeated every five years.   The final rule also formalizes the NCUA’s legal opinions that pass-through insurance coverage applies to “529” tuition programs, and that federal insurance coverage extends to shares denominated in a foreign currency.

Regarding the share insurance changes, the interim final rule provided for pass-though coverage to each participant of an employee benefit plan who is a member of the credit union but limits the acceptance of shares in employee benefit plans to insured credit unions that are “well-capitalized” or “adequately capitalized.”  The final rule changes this provision by extending full coverage to all participants in an employee benefit plan.  The NCUA does not believe it is necessary to restrict this extended coverage only to plans where the plan trustee or the employer sponsoring the plan is a member or if some percentage of plan participants are members. The NCUA finds the language of the Conforming Amendments Act (which also amended the FCU Act) does not impose any membership restrictions and support’s the agency’s position.  Thus, the examples in Paragraphs G. 3(a) and (b) of the Appendix to 12 CFR 745 have been revised to reflect this change.  

While the NCUA and the FDIC have been coordinating their efforts to implement the changes mandated by the recent deposit insurance reforms, the two agencies will act separately on other issues, such as changes to insurance fund logos.