Source: https://nafcucomplianceblog.typepad.com/nafcu_weblog/irs/
Timestamp: 2019-04-25 01:48:31+00:00

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Happy Monday to all of you out there in regulatory compliance land. Since our May 13, 2016 blog, we have received some questions from our members regarding whether the U.S. Department of Labor’s Fiduciary Duty Rule applies to credit unions. Since the rule is somewhat complex and guidance from the Department of Labor is still forthcoming, this blog breaks down some of the more apparent ways that credit unions can find themselves subject to the requirements of the rule.
Before diving into the rule, it is important to dispel a major misconception that may cause some confusion. NCUA has traditionally stated that federal credit unions may not act as broker-dealers in securities or provide investment advice of the type that would render them “investment advisers” under state or federal securities laws. See, NCUA Letter to Federal Credit Unions 10-FCU-03 (Dec. 2010) (broker-dealers); NCUA Legal Opinion Letter 09-0511 (June 3, 2009) (investment advisers). While the Fiduciary Duty Rule covers these types of activities, it also covers transactions and relationships that have traditionally escaped scrutiny under federal securities laws, including a significant number of transactions and relationships relating to individual retirement accounts (IRAs).
It is also important to note that not every communication will rise to the level of fiduciary investment advice. The requirements of the rule are triggered when an individual provides a “recommendation” regarding certain specified activities. The rule defines a “recommendation” as “a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” 29 C.F.R. § 2510.3-21(b)(1). Our May 13, 2016 blog discusses the exceptions to this definition, some of which are also provided below, including an exception for generalized marketing materials. All of that being said, here are some of the more common ways that credit unions may be subject to the Fiduciary Duty Rule.
The Department continues to believe that the recommendation of another person to be entrusted with investment advice or investment management authority over retirement assets is often critical to the proper management and investment of those assets and should be fiduciary in nature. Recommendations of investment advisers or managers are no different than recommendations of investments that the plan or IRA may acquire and are often, by virtue of the track record or information surrounding the capabilities and strategies that are employed by the recommended fiduciary, inseparable from the types of investments that the plan or IRA will acquire. For example, the assessment of an investment fund manager or management is often a critical part of the analysis of which fund to pick for investing plan or IRA assets. That decision thus is clearly part of a prudent investment analysis, and advice on that subject is, in the Department’s view, fairly characterized as investment advice. Failing to include such advice within the scope of the final rule carries the risk of creating a significant gap or loophole.
81 Fed. Reg. 20964, 20968 (Apr. 8, 2016). One thing to note is that under this new fiduciary duty regime, many traditional compensation structures used by financial institutions and investment advisory affiliates would be prohibited. In order to preserve some of these, the Department created the Best Interest Contract Exemption which was also published in the Federal Register on the same day as the Fiduciary Duty Rule. More details about this exemption are covered in our May 13, 2016 blog.
The Department continues to believe that decisions to take a benefit distribution or engage in rollover transactions are among the most, if not the most, important financial decisions that plan participants and beneficiaries, and IRA owners are called upon to make. The Department also continues to believe that advice provided at this juncture, even if not accompanied by a specific recommendation on how to invest assets, should be treated as investment advice under the final rule. The final rule thus adopts the provision in the proposal and supersedes Advisory Opinion 2005–23A. The advisory opinion failed to consider that advice to take a distribution of assets from a plan is actually advice to sell, withdraw, or transfer investment assets currently held in a plan. Thus, a distribution recommendation involves either advice to change specific investments in the plan or to change fees and services directly affecting the return on those investments. Even if the assets will not be covered by ERISA or the Code when they are moved outside the plan or IRA, the recommendation to change the plan or IRA investments is investment advice under ERISA and the Code. Thus, recommendations on distributions (including rollovers or transfers into another plan or IRA) or recommendations to entrust plan or IRA assets to a particular IRA provider would fall within the scope of investment advice in this regulation, and would be covered by Title I of ERISA, including the enforcement provisions of section 502(a). Further, in the Department’s view, recommendations to take a distribution or rollover to an IRA and recommendations not to take a distribution or to keep assets in a plan should be treated the same in terms of evaluating whether the communication constitutes fiduciary investment advice.
81 Fed. Reg. at 20964. Since many discussions regarding rollovers or transfers may begin at the teller line, this means that credit unions may want to consider what sorts of marketing strategies they employ when trying to offer these types of products to members. Furthermore, the fact that a credit union making a recommendation to rollover or transfer an IRA may be considered a fiduciary under the Department’s rule may require a larger conversation regarding what sorts of products are marketed to members through mailings or other publications and what sorts of products are offered at the teller line as part of a daily member-teller encounter.
Exceptions. As I discussed above, not every communication will subject a credit union to the requirements of the rule. For example, investment education services offered to a plan, plan fiduciary, plan participant or beneficiary, an IRA or IRA owner are not typically considered “recommendations” provided that they do not include investment advice regarding specific investment products. 29 C.F.R. § 2510.3-21(b)(2)(iv). General plan information; financial, investment, and retirement information; information about asset allocation models; and some interactive investment materials such as questionnaires, worksheets, and software typically fall within this exception. 29 C.F.R. § 2510.3-21(b)(2)(iv)(A)-(D). Therefore, credit unions that offer these services as a member service can continue to offer these types of education materials without being considered to have offered investment advice under either ERISA or the Code.
These are some of the more common ways that credit unions can become fiduciaries under the Department of Labor’s new rule. Luckily, the rule is not effective until next year so credit unions have some time to review compensation structures and arrangements now to determine how this rule will impact credit union operations and relationships with affiliates. The rule becomes effective on April 10, 2017.
When are marketing bonuses or incentives reportable to the IRS? What form should be used?
It depends on whether the bonus is paid in connection with a deposit account (e.g., a “bonus” under the Truth in Savings definition at 12 C.F.R. § 707.2(e)) or as part of some other incentive program.
The IRS defines interest as amounts paid for the use or forbearance of money, which includes amounts, whether or not designated as interest, paid on savings accounts and other deposit arrangements. See, Internal Revenue Bulletin No. 2000–28 (July 10, 2000). Under 26 U.S.C. § 6049, the IRS treats cash premiums paid with respect to opening accounts as interest which must be reported, if it aggregates to $10.00 or more a year. A 1099-INT would need to be issued for these payments.
Note the slight difference between the IRS threshold ($10 or more) and the NCUA’s de minimus rule regarding bonuses under Truth in Savings (more than $10). See, 12 C.F.R. Pt. 707, Appendix C, comment 707.2(f)-4. Where an incentive of exactly $10 is paid to open an account – it would not be a bonus under NCUA’s Truth in Savings regulation which would require disclosure – but it would be interest under the IRS rules and reportable on the 1099-INT.
Income that doesn’t meet the definition of interest under the IRS rules, such as loan incentives, are reportable as miscellaneous income on the 1099-MISC, if the reporting threshold is met. Under 26 U.S.C. § 6041, the payments should be reported if all miscellaneous payments to the member aggregate to $600.00 or more a year.
There is some disagreement about whether to report on a 1099-INT or 1099-MISC where an incentive is offered in exchange for contracting for multiple services. Credit unions might wish to speak with a tax professional to determine how to report such an incentive payment.
We have some members that are tax exempt. Do we still need to send a 1099-INT for them?
“Exceptions to reporting. No Form 1099-INT must be filed for payments made to exempt recipients or to interest excluded from reporting.
These exemptions are codified in 26 C.F.R. § 1.6049-4(c)(1)(ii)(A)-(B).
Can a credit union be held liable if an ACH payment of an IRS tax refund is sent to a wrong or fraudulent account?
The Department of Treasury hosts a website containing Frequently Asked Questions for financial institutions regarding direct deposit of IRS tax refunds. Among other information, it states that a receiving depository financial institution (RDFI) is not liable for IRS tax refunds sent to erroneous or fraudulent accounts when the IRS provided incorrect information. An RDFI may rely on the account number only, and is not required to match the name on the account. If the RDFI learns that the refund has been misdirected to the wrong account, it must notify the government of the error, and, while it is not required to return the funds, it is encouraged to do so if they are still available. For more detail, see the Treasury’s guide to federal ACH payments, referred to as the Green Book, Chapter 2, page 7.
NACHA has implemented an opt-in program to allow RDFIs to more easily reject refunds where the name mismatches the account or fraud is suspected. For more information about that program, consult the Treasury’s website.
What should a credit union do if it receives a federal payment for a deceased member?
It depends on what kind of federal payment it is. Some federal benefits, such as social security benefits, are subject to reclamation and others are not. The Green Book, Chapter 5, page 4 contains a table identifying which payments are subject to reclamation.
As an example, the Social Security Administration requires that benefits be returned for the month in which the member died (which would be paid out in the subsequent month). This fact sheet gives some background. Chapter 5 of the Green Book provides detailed reclamation procedures and liability calculations.
On the other hand, IRS tax refund payments sent through the ACH network are not subject to reclamation. If a credit union receives a tax refund for a deceased member, it is not required to take any further action. See, U.S. Department of Treasury’s Direct Deposit of Tax Refunds FAQ website.
NAFCU members with additional questions this tax season should not hesitate to reach out to the Regulatory Compliance Team.
The Winter 2016 issue of Kaufman & Canoles Credit Union Legal Update has been released. It makes six predictions for the legal concerns of credit unions in 2016. Have a look to see their predictions for medallion issues, class action litigation, foreclosures, TRID compliance, mergers and employment issues.
Below are just a few quick items for your Friday - have a great weekend!
Qualified Mortgages. The Consumer Financial Protection Bureau has reopened the comment period for their Qualified Mortgage rule (also known as the Ability-to-Repay rule). The new comment period ends on July 9, 2012. It had been expected that the CFPB would finalize this rule in early 2012 but it kept getting pushed back - with good reason as this rule has the potential to significantly alter the mortgage market - and now looks like it will be late 2012 before a final rule. Dodd-Frank requires the rule in place by January 2013. The CFPB's notice regarding the extended comment period is here.
Flood. A 2-month extension was passed and then signed by President Obama. This extends the National Flood Insurance Program (NFIP) through July.
NAFCU's Compliance Monitor. Our June 2012 issue of NAFCU's Compliance Monitor is now available for download by NAFCU members. This month the articles focus on Reporting Interest Payments to Nonresident Aliens as well as the increased Focus on Fair Lending.
Fair Lending Webinars. The Federal Reserve's Consumer Outlook Live series is hosting a June 21st webinar on 2010 Census Data - What it Means for CRA, HMDA and Fair Lending Compliance. The webinar is free and follows on the heels of their November 2, 2011 - Fair Lending Issues and Hot Topics webinar (archived version available).
Fair Lending. The Consumer Financial Protection Bureau (CFPB) is responsible for enforcing the Equal Credit Opportunity Act (ECOA). As part of this responsibility, the CFPB recently issued CFPB Bulletin 2012-04 (Fair Lending) to provide compliance guidance on the fair lending requirements of the ECOA and its implementing regulation, Regulation B.
The Bulletin puts lenders on notice that the CFPB will be monitoring for potential fair lending violations, including practices with unlawful discriminatory effects. The CFPB reaffirmed its commitment to enforcing the ECOA, by recognizing the “disparate impact doctrine” as one of three recognized methods of proving lending discrimination under the ECOA. The Bulletin further puts lenders on notice that lending policies with disproportionate, negative effects on a protected class (“disparate impact”) are illegal and will be pursued by the CFPB.
For a background on Fair Lending and Reg B issues, take a peek at NAFCU's on-demand webcast (live broadcast was April 11th).
IRS Reporting. The IRS finalized a rule requiring financial institutions to report interest paid on or after January 1, 2013, to non-U.S. citizens of certain countries. Alternatively, credit unions may report interest paid to all nonresident aliens. The interest (the aggregate of $10 or more) paid to a nonresident alien should be reported on Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” for the calendar year in which the interest was paid.
For a full reading of the rule, go here. Revenue Proceeding 2012-24 is here - listing the countries covered by this new requirement.
NAFCU Members: Our Regulatory Affairs team has provided a Final Regulation on this issue (12-EF-04) that is available for download.
Maximum Amount. The credit is worth up to 35 percent of a small business' premium costs in 2010 (25% for tax-exempt employers). On January 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).
For the past two years some credit unions have appeared on an IRS list of tax-exempt institutions that had lost their tax exemption. The credit unions could have appeared on that list for a number of reasons, but most of the issues were related to poor recordkeeping or administrative mistakes. In order to claim the heath care tax credit, credit unions will have to file a form 990-T. Since federal credit unions do not have to file a form 990 under normal circumstances, apparently there was a problem last year with federal credit unions filing the form and getting inadvertently put on a list of institutions who had lost their exemption since the IRS did not have the credit unions “on file” for having filed a 990 in any other year. This problem is supposed to have been rectified for the 2011 filing year, by the addition of a new line item to the 990-T, but please take this into account if you decide to file for the tax credit.
Finally, I will close with a solution to a little conundrum that has been bothering me for years: what to do with leftover Chinese food takeout rice. I did not invent this recipe but will gladly take responsibility for foisting it on the credit union community. Take 1 ½ cups rice, one egg and smash it all together with a generous pinch or two of salt. Heat up a few tablespoons of butter over medium high heat, drop decent sized spoonfuls of the rice stuff into the butter and flatten down a bit to make pancakes. Cook 3-4 minutes a side until golden. Easy and good. And cheap. Three of my favorite qualities.
While I know how many of you prefer that the title of the blog should reference the subject matter, that probably wouldn't work so well today. I plan to hit a bunch of topics, so the title would have resembled the name of a certain village in Wales.
Interchange. Representative Barney Frank (D-Mass.) now supports passing legislation (C.U Times) to delay implementation of debit interchange restrictions.
1099. Remember that pesky provision in the health care reform bill that tweaked the 1099-MISC? Well, the Senate passed HR 4, which would repeal the controversial change. The legislation now goes to President Obama for his signature.
CFPB. NAFCU was pleased to take part in a hearing yesterday on how the CFPB will affect credit unions. Lynette Smith, CEO of Washington Gas Light FCU, testified at the hearing on our behalf.
“We believe that if a CFPB is to exist, its primary focus should be on regulating the unregulated in the financial services arena, and not adding new regulatory burdens to those entities that already fall under a functional regulator,” according to Smith’s written testimony prepared for today’s hearing. The authority to regulate all credit unions, she states, should be returned to NCUA.
Mortgage servicing. This post from the Bank Lawyer's Blog notes now some of the nation's largest servicers are entering into consent agreements with their primary regulators. The agreements reportedly demand better internal controls over the servicing areas, including the foreclosure process and communications with borrowers who are in default. One thing caught my eye - the agreements reportedly demand board involvement in the servicing oversight area. This is just another example of how regulators are placing a greater focus on boards and corporate governance. We'll see if these orders find their way into regulation or guidance documents. If I were a betting man, I expect to see some sort of servicing rule or guidance document in the next two years that applies to credit unions. But I'm not a betting man. In Vegas, I once placed a $20 wager that the Nationals would win the World Series.
Speaking of servicing. Is the CFPB interested in these servicing agreements/negotiations/discussions? Yes. Very much so. (ABA Dodd-Frank Tracker)This is one of the reasons I expect some formal rule or guidance document that addresses servicing.
Interchange lawsuit. The lawsuit that attempted to invalidate the Fed's debit interchange rulemaking process? It failed. But much like my $20 wager on the Nationals, I didn't expect all that much success.
FFIEC. NCUA is now chairing the FFIEC. This is a great reminder of an important fact: When you see an FFIEC guidance document, such as an IT Booklet for the BSA Manual, remember that NCUA is part of the FFIEC. Treat that guidance document as if it were created by NCUA itself.
Sheshunoff's Mortgage Lending Operations and Administration manual.
I think one attendee summed the week up well in a brief exchange with me on Friday. He thanked me and NAFCU for the event. I said I was glad that he enjoyed it.
"Oh, I didn't enjoy it. It was a great event and I learned a ton. But I wouldn't call it enjoyable!"
And I know exactly what he meant. It was a wonderful week, but a very tough week.
Force-placed insurance. Here's a fantastic post (Bank Lawyer's Blog) that discusses the AG proposed settlement regarding mortgage servicers and how it would affect force-placed insurance. In short, the settlement agreement would prohibit mortgage loan servicers from earning profit from force-placed insurance policies. Under the proposal, mortgage servicers would be prohibited from force-placing insurance with an affiliate, and from accepting "kick-backs," referral fees or accepting anything of value related to the force-placement of insurance. If you want the bloody details, just start reading on page 24. My takeaway? Any income you receive from force-placed insurance related to mortgage servicing is now clearly subject to increased regulatory risk. If the proposed AG agreement finds its way into the requirements of the secondary market, or on to the "to-do" list at the CFPB, the agreement may very well affect your bottom line. Stay tuned.
Board fiduciary duties and policies and procedures. Here's a thought that came up a few times at NAFCU's Compliance School. I see a potential red flag in the following situation. NCUA has indicated that boards should be involved in the formation of many important credit union policies. The board sets the credit union's appetite for risk, its limitations for concentration, etc. When a policy is supposed to reflect a board position, how can that policy be written without their involvement at some level? And how could a credit union adopt a policy created by a third party without having board involvement to tailor it to their credit union's operations? Credit union should consider how this might affect their board members, especially in relation to their duty of care.
HSAs. Treasury has redesigned and reorganized its web page dedicated to Health Savings Accounts.
Board Governance and "Direct Dialing"
I'm sorry, but I don't believe the regulation says that.
I had one of those moments recently with a compliance officer from a federal credit union. It seems that one director from the credit union was calling staff members directly to check in on certain loan applications, certain projects, and the like. The director said that the new NCUA regulation concerning fiduciary duties said that the director could do that, and in fact, encouraged directors to bypass the CEO to deal with staff whenever they wanted.
Let's say it together. I'm sorry, but I don't believe the regulation says that.
The director perhaps read a news article that casually talked about the regulation. Or perhaps the director did skim the new rule. In any event, the regulation doesn't exactly support the director's argument.
(2) Federal credit union staff providing services to the board of directors or any committee of the board under paragraph (c)(1) of this section may be required by the board of directors or such committee to report directly to the board or such committee, as appropriate.
I'll just make a few points on this text. There's no mention of "director" in that paragraph. Rather, this paragraph talks of the board's right to require staff to report to the board, or a committee of the board, as appropriate. A director, by himself or herself, has little to no power. It is only as part of a board that the director can vote on matters, assuming a quorum is present. So, a board, or a committee of a board, would have that right - but, again, this paragraph does not talk about a director's individual right.
Did NCUA discuss this issue elsewhere? Yes, they did. When NCUA issues a final rule, they also publish a "discussion" section that goes into detail regarding what they were thinking when they crafted certain provisions of a regulation. Here's what they said about the paragraph that we're discussing today.
Some commenters opposed the provision requiring FCU employees (staff) to report directly to the board of directors or committees of the board, stating this would undermine management’s authority over the employees of the credit union. Another commenter questioned whether committees other than the supervisory committee had the authority to require employees to report directly to the committee. One commenter argued that direct contact between the board of directors and the credit union’s employees would put employees at the beck and call of the board and could interfere with the employees’ regular duties.
To summarize, a federal credit union's board does have the right to gain direct access to information from credit union employees. And they have that right, as appropriate, as needed to perform their duties. But NCUA went on to clarify that boards should not bypass the CEO to direct or manage the credit union's employees. That's the CEO's job.
Here are some tasty compliance tid-bits.
The repeal of a new and controversial 1099-MISC reporting requirement is nearly here.
Episode 57 of "Current Issues in Credit Unions" is fresh out of the oven.
MDIA. The Federal Reserve's Tuesday press release seems to have caused some confusion - due to docket numbers. As Anthony noted yesterday, the press release indicated the Federal Reserve was not going to finalize three current proposed rulemakings prior to the transfer of rulemaking authority to the CFPB. The docket numbers for these rulemakings were included in this press release and one of the docket numbers (Docket number R-1366) happens to also be the docket number for the MDIA interim final rule. So this question arose yesterday - does this mean that the MDIA rule is killed? No, no it doesn’t. They didn't withdraw the interim final rule - it's still on the books.
Healthcare. We just wanted to clarify yesterday's blog post about the 1099. The Senate did not actually vote to repeal the 1099 provision from the healthcare bill. Rather, they voted to add language to an existing bill, that if enacted would repeal the 1099 provision. That bill currently remains in the Senate. Yesterday's post has been fixed.
CFPB. The Cop on the Beat has launched its website. Since the CFPB is taking over rulemaking authority for most of the consumer protections regs, you’ll want to be familiar with this site.
The Fed. You may have heard that the Federal Reserve has announced that it doesn't expect to complete three Regulation Z rulemaking initiatives before the CFPB assumes rulemaking authority for Regulation Z. The rulemakings would have addressed mortgage disclosures (including HELOCs), the right of rescission, credit protection products (such as disability insurance), and reverse mortgages and modifications. You can read more about their decision via the link above. Is the news good or bad? Yes. On one hand, this calms things down on the Reg Z front - at least for a little bit. The CFPB takes hold of Reg Z in July, so these rules aren't going to be finalized before then. But on the other hand, these issues can be picked up by the CFPB. So the story isn't over. How the CFPB will choose to proceed is a major unknown. Stay tuned.
HMDA. Bankersonline.com does a nice job of gathering civil money penalty information. A number of FDIC-regulated entities have been hit with civil money penalties for HMDA violations. A large number. This underscores the importance of understanding HMDA, which is why I love the FFIEC's HMDA compliance guide.
Regulation Z. The FFIEC has announced (via the Fed) that the interagency Regulation Z examination guidelines have been updated. This, folks, is a useful compliance resource.
Because it is Friday, and because I love all of you, I thought I would try to save you some money. Here's a regulatory wrinkle that might save your credit union a few dollars.
IRA periodic statements. If your credit union offers IRA accounts, you may be shocked to learn this little fact. You are under no legal obligation to deliver IRA periodic statements. IRAs are exempt from Regulation E, as the regulation considers them to be "trusts." Trusts, are not subject to Regulation E, per the regulation's definition of "account." In addition, Truth in Savings does not mandate that you send a periodic statement. It only creates certain requirements if you do. For the "Doubting Thomas" in you, here's the regulatory language from Regulation E.
(b)(1) Account means a demand deposit (checking), savings, or other consumer asset account (other than an occasional or incidental credit balance in a credit plan) held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes.
(2) The term includes a “payroll card account” which is an account that is directly or indirectly established through an employer and to which electronic fund transfers of the consumer's wages, salary, or other employee compensation (such as commissions), are made on a recurring basis, whether the account is operated or managed by the employer, a third-party payroll processor, a depository institution or any other person. For rules governing payroll card accounts, see §205.18.
(3) The term does not include an account held by a financial institution under a bona fide trust agreement.
Custodial agreements. An account held under a custodial agreement that qualifies as a trust under the Internal Revenue Code, such as an individual retirement account, is considered to be held under a trust agreement for purposes of Regulation E.
If you add the two together, you'll find that IRAs are not subject to Regulation E. Therefore, they are not subject to Regulation E's periodic statement requirements. Even if the IRA gets an electronic deposit. Now, let's look at NCUA's Truth in Savings regulation.
The staff commentary to NCUA's Truth in Savings regulation point blank states that the regulation does not require that you send a periodic statement. It simply states that if you do so, you must follow its requirements.
Note that the definition of "periodic statement" also excludes "share certificates." Therefore, even TIS's requirements do not apply to share certificates. So, if you have an IRA account that only holds a share certificate, you are completely off the radar. NCUA only requires if you voluntarily disclose information, that the information be accurate and not misleading.
IRAs (and HSAs for that matter) are not "accounts" for the purposes of Reg E. For that reason, they are not subject to Reg E's periodic statement requirements - even if the member deposits funds electronically into the account on a regular basis.
Truth in savings does not mandate that you send periodic statements. Its requirements only kick in if you decide to send one. And its requirements do not apply to share certificate accounts.
So, how can this save you money? Let's see.
Technically, you could simply do away with periodic statements for IRAs. You would still have to send the IRS-mandated disclosures, so members would still get some information. This choice, however, may not be feasible from a "member expectation" point of view.
If you are going to send periodic statements, there's certainly no regulatory need to send them on a monthly basis. Quarterly certainly is OK. And I don't see a regulatory hurdle to an annual periodic statement. You just have to meet NCUA's Truth in Savings requirements if the IRA account holds a non share-certificate, account.
Shameless plug. Next Wednesday, I'll take part in a 2-hour long webcast that will cover the August 22 Reg Z changes and the changes found within the 2010 BSA/AML Examination Manual. I've reviewed the slides so far, I'm convinced that the content will be worth your time. I'll take roughly 20 slides and 30-40 minutes to hit the BSA portion, and then Steve and Sarah will address the remainder. We've allotted an extra 30 minutes to answer any extra questions and answers, as we'll hit on so many topics. And yes, I do note the irony. I tried to save you money above. And now I'm asking for it. Such is life.
Happy Friday, everyone! Here's some info to help start the weekend.
Backup Witholding. The IRS has issued Announcement 2010-41 regarding new procedures for backup withholding. The announcement applies only when a credit union receives a second notice from the IRS that a member has provided an incorrect taxpayer identification number (TIN) or name. Under IRS rules, when the second notice is received the credit union must obtain validation of the TIN from the Social Security Administration (SSA) or the IRS, but to do that, the member must authorize the SSA to send the now discontinued Form SSA-7028 to the credit union. The announcement outlines how the credit union needs to notify the member on providing the credit union with validation of the SSN.
BSA Civil Money Penalty. Yesterday, FinCEN announced a $1 million civil money penalty against Pamrapo Savings.
Pamrapo’s lack of internal controls combined with unqualified BSA compliance personnel, relatively non-existent training and deficient independent testing resulted in a wholly ineffective BSA compliance program which, in turn, resulted in the failure to file a substantial number of currency transaction and suspicious activity reports in an accurate and timely manner. Pamrapo Savings Bank, without admitting or denying the allegations, consented to payment of the civil money penalty.
Fiduciary Duties. NAFCU recently sent this comment letter to NCUA on the fiduciary duties proposal. I like reading comment letters, because they can highlight issues that you may have missed when reading a proposal. If you look at NCUA's proposal rules homepage, they have links where you can read the comments.
First, the proposal is just a proposal. We won't know what the final rule requires until it is issued.
Assuming that the final rule will mirror the proposal (which is a huge assumption), there appears to be two major areas where directors may need training. First, the proposal appears to require that, within 90 days of joining the board, directors need to have training on financial issues so that they can read a financial statement and raise appropriate questions. Second, directors have to be able to ensure that the credit union runs its affairs within all applicable laws and regulations. Both of these areas likely will need training.
Does our training meet these requirements? That's a tough call, because I'm not the final judge. We do have an ALM session that addresses some aspects of financial reports. We do talk about how credit unions are regulated and examined. And we address BSA. But ultimately, you'll have to ensure that the training program you select meets your needs. In other words, do your due diligence. With that in mind, take a look of the outline of our training program for directors and officials. And here is the training homepage, which includes a demo.
Flood. The FDIC recently issued more than $16,000 in civil money penalties against two different banks for alleged flood insurance violations. This really worries me, because banks get clobbered for flood insurance deficiencies all the time. Don't believe me? Look at this page at BankersOnline to see the list of flood CMPs. More than 25 banks have received civil money penalties this year. But for some reason, credit unions do not get these CMPs, even though the requirements are the same. This keeps me up at night. With that in mind, we'll have someone at this year's NAFCU Compliance Seminar to address flood insurance issues. Here's a description of the session.
This presentation will provide insight into credit unions’ compliance obligations under the federal flood regulations with a focus on changing requirements under recently revised regulatory guidance. You will learn about the regulators’ “Questions and Answers Regarding Flood Insurance”, challenges related to resolving flood determination discrepancies, and NFIP reform and how it impacts credit unions and their members. Opportunities for asking questions will be provided to allow you to bring your compliance issues to the table. Presented by Scott Giberson, CFM, Compliance Manager, CoreLogic Flood Services.
OK, that's enough for today. Enjoy your weekend, everyone!
There has been a bit of confusion over whether federal credit unions must file an IRS Form 990. To clear things up, they do not. But don't take my word. Back in 1988, NCUA issued Letter to Credit Unions 100 to explain why credit unions are exempt from the requirement.
The Internal Revenue Service has now informed us that, according to their regulations, organizations that are tax exempt under Section 501(c)(1) of the IRC do not have to file an informational return or make such return available for inspection. (See Section 1.6033-2(g) (vi) of the Income Tax regulations, 26 C.F.R. 1.6033-2(g)(1)(vi).) Since FCU’s are tax exempt under Section 501 (c) (1) of the IRC, FCU’s are not required to file or maintain an informational tax return. Accordingly, NCUA will no longer file a consolidated Form 990.
File this one away, as it is a nice way to show why we don' t need to file the IRS 990 when that question pops up.
Here are a few things that have been rattling around my in-box recently.
It was further part of the conspiracy that (the bank) opened multiple accounts held in the names of nominees or other business entities so that the cash deposits, on any one day in excess of $10,000, could be deposited into the various accounts, in order to conceal the relationship between the transactions and the depositors and to avoid the filing of any reports. Emphasis added.
The IRS is starting a pilot program to allow those who file IRS information returns to truncate the individual's 9-digit identifying number on paper payee statements. It looks like the pilot program is limited to 1098s, 1099s and 5498s.
NCUA issues Regulatory Alert 09-RA-14 to highlight recent changes to Reg CC and how those changes might affect your funds availability policy.
NCUA issues Regulatory Alert 09-RA-13 to highlight changes to the annual fee threshold for HOEPA loans under 12 C.F.R. Part 226.32. The dollar threshold will drop from $583 to $579, effective January 1, 2010.
The IRS has released IRS Notice 2009-09 to help financial institutions report required minimum distributions (RMDs) for 2009. As you may recall, President Bush recently signed the Worker, Retiree, and Employee Recovery Act of 2008, which waives RMDs for 2009. The notice gives guidance on how to complete IRS Form 5498 and gives other tips.
Issuers of the 2008 Form 5498, IRA Contribution Information, should not put a check in Box 11. However, in recognition of the short amount of time to make programming changes, if a financial institution issues a 2008 Form 5498 with a check in Box 11, the IRS will not consider such form issued incorrectly solely because of the check in Box 11, provided the IRA owner is notified by the financial institution no later than March 31, 2009, that no RMD is required for 2009.
In addition, the RMD information required under Notice 2002-27, 2002-18 I.R.B. 814, need not be sent to IRA owners for 2009. If a financial institution sends a separate RMD statement to an IRA owner, either initially or in response to the owner’s request for the financial institution to calculate the RMD for 2009, the financial institution must show the RMD for 2009 as zero (0). Alternatively, the financial institution may send the IRA owner a statement showing the RMD that would have been required but for the waiver of RMDs for 2009, along with an explanation of the waiver for 2009.
The IRS encourages all financial institutions to inform IRA owners who delayed taking their 2008 RMD until April 1, 2009, that they are still required to take that distribution.
FEMA recently unveiled its new Standard Flood Hazard Determination Form. (Unveil, perhaps is too strong a word. This certainly isn't the new I-Phone.) Access the FEMA press release here, which also contains a link to the new form. To allow users of the Form time to update their systems to the new version, the effective date for mandatory use of the new Form will be June 16, 2009.
The FBI warns consumers of recently reported spam e-mail purportedly from the Internal Revenue Service (IRS) which is actually an attempt to steal consumer information. The e-mail advises the recipient that direct deposit is the fastest and easiest way to receive their economic stimulus tax rebate. The message contains a hyperlink to a fraudulent form which requests the recipient's personally identifiable information, including bank account information. To convince consumers to reply, the e-mail warns that a failure to complete the form in a timely manner will delay the issuance of the rebate check.
Why should compliance officers care about this? NCUA's security guidelines require credit unions to take appropriate steps to safeguard sensitive member information. In recent guidance, NCUA suggests that education campaigns alerting members to phishing scams and other threats are a good idea. Here's a timely threat to your members that you may want to incorporate into some sort of member education. Or you should be aware of it, at the very least.
FinCEN has a New Look; You Win Some, You Lose Some; Where's My Check?
FinCEN has updated its web page. I normally get queasy when agencies update their web pages, because I have to spend the next two weeks wandering around the "new and improved" website to find what I need. But this change makes sense. You can visit it here. FinCEN now organizes information by industry. Along the top, you'll see an icon for "financial institutions." When you click on that, you'll go to an area that gathers all the information that pertains to us. Nice.
NAFCU (4-6) split another double-header. Somehow, we have to win two in a row to get back to .500. I'd like to say that we're a much better team than our record reflects. But doesn't every team with a losing record say that? That being said, we are a much better team than our record reflects. Really.
Here's a link to an old post that tells you when you can expect your IRS stimulus check. Or, as my friend Larry puts it, when he can expect to buy a big screen TV. Based on the IRS schedule, many of the checks are about to delivered or are on their way very soon. For credit unions, this could lead to increased deposits or loan payments.

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