Comment Call: Proposed Clarifications to Overdraft Protection Rules Under Regulations E and DD

CUNA
March 11, 2010

The Federal Reserve Board (Fed) has issued clarifications to the recent final rules amending Regulation E, the Electronic Fund Transfer Act, that prohibit credit unions and other financial institutions from charging overdraft fees for ATM and one-time debit transactions, unless the consumer consents, or “opts-in.” Compliance with these rules will be mandatory as of July 1, 2010, although fees may continue to be assessed without the consumer's permission until August 15, 2010 for those accounts in existence as of July 1st. Click here for more information about these recent final rules.

The Fed has also issued clarifications to the recent final rules amending Regulation DD, the Truth in Savings Act (TISA), that changed the disclosure requirements for overdraft protection plans. The Regulation DD rules do not apply to credit unions but the National Credit Union Administration has issued substantially similar rules, as required under TISA. Compliance with the recent rules issued by both the Fed and NCUA was required as of January 1, 2010. Click here for more information about these rules.

Although credit unions and others have an opportunity to comment on these clarifications, the Fed has emphasized that they will not change the substantive provisions of these rules and that these comments should be limited to the proposed clarifications.

Here are the clarifications for the Regulation E rules:

• The rules include an exception from the requirement to send a notice and obtain an opt-in before charging overdraft fees if the financial institution has a policy and practice of declining ATM and one-time debit transactions when the institution has a reasonable belief that the account has insufficient funds at the time the authorization is requested. The proposal clarifies that charging fees are still prohibited if the consumer does not opt-in and that this exception only provides relief from the notice and opt-in requirements.
• The Fed recognizes that financial institutions may not be able to avoid paying certain ATM and one-time debit transactions that overdraw the account and that the institution will not be able to charge a fee if the consumer does not opt-in. However, the rules prohibit charging fees in these situations, and the proposal clarifies this prohibition.
• If the consumer opts-in, the financial institution must send a written confirmation of the opt-in selection. The proposal will clarify the official staff commentary to Regulation E to indicate that fees may not be charged until the confirmation is sent to the consumer and that institutions will be in compliance with these provisions if they have adopted reasonable procedures designed to ensure that the written confirmation is sent before fees are assessed.
• Some institutions impose different, or “tiered,” fees based on the outstanding negative balance at the end of the day. This would be when one fee is charged if the negative balance is below a certain amount, while a higher fee is charged if the negative balance is above this amount. The proposal will clarify the official staff commentary to indicate that this fee must be based on the amount based solely on the check, automated clearinghouse (ACH), or other transactions if the consumer has not opted-in to ATM and one-time debit transactions. For example, if a negative balance is attributable to both a debit and check transaction, then it would only be the amount of the check transaction that would determine which tier would apply.
• Some institutions may apply daily or sustained overdraft fees in which an additional fee is charged if the overdrawn amount is not repaid within a certain amount of time. Although this is not permitted for ATM and one-time debit transactions, unless the consumer opts-in, these types of fees are permitted for check, ACH, and recurring debit transactions. The official staff commentary clarifies that fees may be charged in situations in which a negative balance results from both an overdraft in which an opt-in is required and an overdraft, such as a check or ACH transaction, in which the opt-in is not required. For example, if an account has a balance of $50 and there is then a $60 debit and a $40 check transaction, the institution may charge a fee for the check only and then charge a sustained fee if the negative balance at that time is attributable in part to the $40 check. For sustained fees, the date that the account goes into overdraft is determined solely by the date that the check, ACH, or other transaction is paid into overdraft for purposes of calculating the date when a sustained fee can later be charged, even if ATM and one-time debit transactions are posted on different dates. For example, if new fees are charged if the account remains negative after five days, then the five-day period begins on the date the check, ACH, or other transaction is posted, regardless of when the ATM or one-time debit transaction is posted.
• The proposal revises the official staff commentary to clarify that credit secured by margin securities in brokerage accounts extended by registered broker-dealers is not considered an “overdraft service.”
• The Fed intends to finalize these clarifications before the July 1, 2010 mandatory compliance date.

Here are the clarifications for the Regulation DD rules:

• The proposal clarifies that the term “Total Overdraft Fees” must be used on the period statement when describing the total amount of fees imposed for paying overdrafts.
• For balance information that is disclosed through an automated system, the rules require that it not include the amount available that the institution may provide to cover items, including amounts available under an overdraft program. The proposal clarifies that amounts available under a retail sweep account can, however, be included in the disclosed balance information.
• The rules allow disclosure of an additional balance that is available through an overdraft program, line of credit, or transfer from another account, as long as it is prominently disclosed that this second balance includes this additional amount. The rules indicate that the second balance may not be disclosed if it is in connection with an overdraft service if the consumer has opted-out of the service. The proposal clarifies that this also includes when the consumer has not opted-in when the opt-in is required for the service. If the additional funds are not available for all types of transactions, then this must also be disclosed along with the additional balance. The proposal includes the example that it must be disclosed that the consumer may not access the overdraft balance through ATM and one-time debit transactions if the consumer has not opted-in to the program, even if the funds may be available through a line of credit or transfer from another account.
• The clarification with regard to the use of the term “Total Overdraft Fees” will be effective 90 days after these clarifications are issued in final form. The other clarifications will be effective 30 days after they are issued in final form.

Comments are due to the Fed by March 31, 2010. Comments are due to CUNA by March 23, 2010.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.com and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.com; or mail them to Mary and Jeff in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, 6th Floor, Washington, DC 20004. You may also contact us if you would like a copy of the proposed clarifications or you may access them here:

• Regulation E clarifications
• Regulation DD clarifications

> View the full comment call with questions to consider at cuna.org

Pennies and Dollars

Seth Godin
March 10, 2010

"Watch the pennies and the dollars will take care of themselves."

I'm not sure this is true. In fact, I'm pretty sure that if you watch the dollars, you don't have to worry so much about pennies.

Big brands don't sweat the small expenses. They don't hassle about a return, or a little coupon fraud or the last penny per square foot on the rent in a prime location. In fact, they understand that there's a powerful honest signal sent when you don't worry about the tiny expenses. It shows confidence.

My first business was running a ski club from my high school to a nearby ski area. Most of the other clubs rented expensive coach buses. I rented school buses. That one shift saved thousands of dollars. As a result, I had plenty of money to spend on snacks for the bus, no hassles about refunds if you broke your leg . . . it was easy to be generous because I'd saved so much on the bus.

So many small businesspeople are crippled by their relationship with money. I know—I used to window shop at restaurants and then go home and eat Spaghetti-Os. The thing is, if you run out of money you lose the game. That's a given. But what's the best strategy for not running out of money?

I don't think the answer is to worry insanely about little expenses (saving $20 on your blogging expenses in exchange for distracting ads, for example). In fact, too much worrying about cash is the work of the lizard brain—it's a symptom of someone self-sabotaging the work.

The thing to do is invest in scary innovations, large leaps, significant savings. Instead of renting a skimpy booth at the big trade show and scrimping on all the extras, why not rent a limo and drive the key buyers around town, or sponsor the awards luncheon? When you skimp all the time, you signal that you're struggling. 

Seth Godin is a marketing expert, blogger, and bestselling author. Read his blog at www.sethgodin.typepad.com. Reprinted with permission.

CU Net Worth Finished 2009 Strong

NCUA
March 5, 2010

Credit unions finished 2009 with nearly 10% net worth, while loan demand and delinquencies showed weakness in the face of economic stress, according to Call Report data released March 1 by NCUA. Membership in the nation's 7,554 federally insured credit unions increased to nearly 90 million, and shares grew at a robust 10.5%.

“Credit union membership growth is impressive and encouraging,” says NCUA Chairman Debbie Matz. “These positive developments, however, are tempered by recognition of ongoing market stresses. This reality reinforces NCUA's decision to increase examination staff and augment regulatory oversight to monitor and assist credit unions faced with persistent, adverse economic conditions.”

Reflecting stress in the job market and a struggling economy, delinquent loans to total loans increased to 1.82%. Credit unions continued to build provisions for loan losses as the ratio of net charge-offs to average loans grew from 0.85% to 1.21% during the year.

Overall loan volume grew 1.1%. Most of the loan growth in 2009 was in used automobile, credit card, and first mortgages.

Net income returned to a positive $1.7 billion after a two-year decline. This figure includes both NCUSIF stabilization income and expense in 2009. Data also suggests that, by improving cost management, credit unions reduced operating expenses and the return on average assets grew 24 basis points compared to year-end 2008.

Details of major balance-sheet items and member growth in federally insured credit unions from January through December 2009 include:

• Assets increased 9.08% to $884.8 billion from $811.1 billion;
• Loans grew 1.1% to $572.4 billion from $566.0 billion;
• Shares increased 10.5% to $752.7 billion from $681.1 billion;
• Investments increased 27.3% to $210.9 billion from $165.7 billion;
• Net worth grew 1.9% to $87.7 billion from $86.1 billion; and
• Membership increased 1.5% to 89.9 million from 88.6 million members.

Because share growth significantly outpaced loan growth during 2009, the loan-to-share ratio declined to 76.05% from 83.1% posted at year-end 2008. This resulted in significant investment growth.

Within share accounts, regular shares, share drafts, and IRA/Keogh accounts each posted double-digit increases, and money market shares grew a substantial 23.5%.

Funds in federally insured credit union share certificates declined 0.2%. Used-car loans increased 4.1%. First mortgage real estate loans and lines of credit grew 4.4% in 2009. Credit cards posted 6.6% increase—2% lower than the 8.6% unsecured credit card debt posted in 2008. New-car loans declined 7.7% and other types of real estate loans declined 4.3%.

To protect against potential losses, federally insured credit unions increased provisions for loan and lease losses by 34.1% during 2009 following a 120% increase in 2008. Over $9.4 billion is now set aside to cover loan and lease losses. Delinquent loans grew 33.7% to a reported $10.4 billion.

Why You Should Care about Greece

Dwight Johnston
March 3, 2010

The sovereign debt woes of Greece dominated the headlines for a week and drove a major flight into the dollar and U.S. treasuries. But the immediacy of the Greek problems faded when the EU ministers came out of a meeting and mumbled a few vague sentences of support for Greece. That seemed to satisfy stock traders, although currency traders are less convinced. Some of you might be wondering why we should care or be concerned about Greece's debt at all. The U.S. economy is at least showing some improvement, although employers still seem reluctant to add jobs. But, if you believe in the economic theory that depleted business inventory restocking will boost hiring and the well-timed hiring of 1.2 million census workers will lead to other economic benefits, you could make a strong case for ignoring Greece altogether.

A quick look at the numbers supports the argument to ignore Greece. The population of Greece is about one-third the population of California. Even more striking, the GDP of Greece is roughly $300 billion compared to California's $1.85 trillion.

So, why Greece?

The reason is that Greece represents tip of the iceberg of a bigger trade. The global leverage trade. The leveraged trade comes in many shape forms and fashions. But for those of you not familiar with these trades, here is a quick and simple example.

If investors owned these Greek debt securities outright, this wouldn't be a huge problem. But, the problem mirrors the mortgage-backed securities problem. These bonds are owned through leverage. As short-term borrowing rates plunged, hedge funds and others borrowed near zero to buy the higher-yielding sovereign securities like Greece. This is a global trade. Those speculators sought the cheapest countries in which to borrow. Those countries would be the U.S. and Japan. As an example, a big euro fund would borrow from a U.S. bank. The fund would then sell the borrowed dollars to buy euros for purchase of the Greek bonds, for instance. What happens is that the fall in the value of the bonds triggers margin calls from the U.S. bank. Now the hedge fund is in the position of liquidating the bonds in an illiquid market or selling other more liquid assets. Additionally, a sharply-rising dollar could mean additional large losses as the funds have to convert euros into dollars to meet margin calls or pay off the borrowing.

Take that one example and multiply the impact around the globe in almost any asset class you can think of. The problems with Greek debt should be taken as seriously as the early warning signs or mortgage-related problems should have been taken here. The contagion threat is not to be likely regarded. As liquidity dries up in bonds like the Greek notes, some funds are forced to liquidate more liquid assets to meet margin calls. As those assets start falling in value, other sales are triggered. Again, this is exactly the way the subprime debacle morphed into the great liquidity squeeze and financial meltdown. Just for good measure, you can also add multiple layers of more complex trades involving derivatives on the various assets like Greek bonds. Remember AIG.

Could “Financial Meltdown Part II” become a reality? Unfortunately, the answer is yes. After the first meltdown, credit spreads soared and margin borrowing of any sort was difficult at best. But as global stock markets rallied, credit spreads contracted again and margin requirements (or haircuts on bonds) fell. The levels aren't quite back to the pre-2008 levels, but they are moving in that direction. How could that happen so soon? Two things enabled this. First, something I call “the power of 0%.” With short-term rates so low and funds more available, leveraged players of all ilks could not resist the siren call of free money and poured into any and all assets. Second, absolutely nothing was done on the regulatory side to prevent this. Yes, some leverage was reduced at U.S. banks, but no firm capital requirements were mandated. Just as important, after all the ranting about consolidating and regulating in some fashion the $600-trillion dollar derivatives market, not one initiative has made it out of the starting gates.

If it weren't for the potential of Financial Meltdown II, we could afford ourselves the luxury of assuming the economic recovery will continue, albeit at a moderate pace. Perhaps we will avoid Financial Meltdown II. But as financial managers we can't lose sight of the reality that problems far from our shores and in markets and esoteric instruments not in our purview have the potential to threaten our economy yet again. This is not to suggest you should make your priority a plan for disaster. But, it would be wise to have in your back pocket a Plan B for just that occurrence.

Dwight Johnston is vice president of economic and market research for WesCorp.

CFOs Can Yield Positive ROI For Their CUs By Attending CUNA CFO Council Conference

CUNA CFO Council
March 2, 2010

Credit union finance professionals can calculate their specific return on investment for attending the 16th annual CUNA CFO Council Conference, May 16-19, in New Orleans, La. The CUNA CFO Council has released a “Conference ROI Calculator” spreadsheet on their website.

“In every aspect of the conference, we're ensuring that you generate a positive return on investment for attending,” said Pam Finch, chair of the CUNA CFO Council and CFO at Mid Minnesota FCU in Baxter, Minn. “Our speakers are not only great to listen to, but they'll also provide you with tangible tools and resources you can take back to your credit union that can be applied immediately to your bottom line.”

Individuals can input expenses into the ROI calculator, check all of the boxes of interest, and go to the bottom of the spreadsheet to find the ROI.

“These are hard facts just waiting to be shared with your CEO about attending the conference,” says Finch.

Featured sessions include:

• Non-interest income: now what?!
• ALCO best practices for a heightened regulatory environment
• Using advanced ALM techniques to reduce exposure to interest rate risk
• Wholesale funding strategies
• Expense management best practices and ideas
• After the bailout
• Maximizing ROA on your credit card portfolio
• Dueling economists

The agenda for the conference is created by the CUNA CFO Council conference committee (in partnership with council staff) made up of volunteer council members from credit unions. This ensures the topics are as relevant to attendees as possible.

“What's the ultimate ROI indicator for this conference?” asks Brandon Michaels, chair of the CUNA CFO Council Conference committee and CFO at Mazuma CU in Kansas City, Mo. “It's the simple fact that if you don't stay current in this ever-changing environment, you could fall perilously behind.”

> Click Here for Conference Information & Registration

For program information inquiries, contact Deb Verdecchia, CUNA Councils program coordinator at (800) 356-9655, ext. 4357, or by e-mail at dverdecchia@cuna.coop .