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Frequently Asked Questions
Credit Union Staff
Q: How does the system of volunteer oversight work at a Kansas-chartered credit union?
A: A credit union is like no other financial institution. Owned and operated by the people it serves, every credit union is formed by a group of people wanting to control their own financial destiny.
Management of Kansas credit unions is carried on by volunteers and staff. Members of the Board of elected from the credit unions membership at the annual meeting. The Board is responsible for the well being of the credit union, as members have put their faith in the Board to act in the best interest of the membership.
Q: Is “Courtesy Pay” on transaction accounts considered to be a loan to the member?
A: If your credit union has established an overdraft line of the credit with the member it is a loan subject to the Truth in Lending Act. If your credit union has established a discretionary program to pay overdrafts and disclaims any legal obligation to pay any overdraft is not subject to the Truth in Lending Act.
Your credit unions should follow generally accepted accounting principles (GAAP) and instructions for the NCUA 5300 Call Report to report income and loss recognition on overdraft protection programs. You should report overdraft balances as loans on regulatory reports. Overdraft losses should be charged to the allowance for loans and leases.
You can find a detailed discussion and guidance on “best practices” for credit unions offering courtesy pay programs in NCUA Letter No. 05-CU-03 which applies to all Federally Insured Credit Unions.
Q: What is “courtesy pay”, “overdraft privilege”, “overdraft protection” and are they the same thing?
A: “Courtesy pay”, “overdraft privilege”, and “overdraft protection” are names of plans offered by your credit union so your checks (share drafts) do not bounce and your ATM and debit card transaction go through. Your credit union will still charge you an overdraft fee or bounce coverage fee for each overdraft item. The benefit to you is avoiding the merchant’s returned check fee and you maintain your relationship with the people you do business with.
There is no guarantee your credit union will cover any or all of the transactions that overdraw your account. Your credit union may decide not to cover your overdrafts if you habitually do not put enough money back into your account to cover both the overdraft and the fees associated with the overdraft.
There are other ways to cover overdrafts: 1) Link your checking account to share savings account you have at your credit union; 2) Set up an overdraft line of credit with your credit union; 3) Link your checking account to a credit card you have with your credit union: and 4) Practice good account management by keeping track of how much money you have in your checking account.
Q: What is the low-income designation for credit unions?
A: K.A.R. 121-1 1 allows the Administrator to assign a low-income designation if a majority of the credit union members are low-income members or if the credit union has a geographic field of membership in which the majority of the residents, if members of the credit union, would be low-income members. A credit union designated as a “low-income credit union” may accept low-income non-member shares if requirements are met.
After receiving approval for a low-income designation from the Administrator, the request will be forwarded to the National Credit Union Administration (NCUA) for their approval of a low-income designation. Among the benefits of receiving this designation from NCUA is the eligibility to apply for technical assistance grants to improve member services and increase the efficiency of credit union operations.
ALM and Investments
Q: What is ALM?
A: ALM (Asset/Liability Management) is the process of evaluating balance sheet risk (interest rate and liquidity risk) and making prudent decisions, which enables a credit union to remain financially viable as economic conditions change. A sound ALM process integrates strategic, profitability, and net worth planning with risk management.
Q: What is a yield curve?
A: A yield curve is a graph illustrating the level of interest rates as a function of time to maturity. The most common yield curve plots Treasury securities from the 3-month Treasury bill to the 30-year Treasury bond. This graph can be used as a comparison to investments with similar to maturities, such as a Certificate of Deposit, to judge if the CD’s yield is comparable.
Q: How much liquidity is enough?
A: Too much liquidity may be defined when the cost of excess funds becomes a detriment to the credit union’s bottom line. Short-term cash liquidity ratios can vary from 7% to 15% of assets. Short-term investments and cash are measured with maturities less than one year.
Q: This long-term investment has a high yield, what else should I consider?
There are several scenarios to consider. Does the investment require a premium to be paid to purchase? Does the investment have a call feature, step-up feature, or a cap? What is the average life of the investment? What will the market value be in rising or declining interest rate market? Should the investment be “Held to Maturity” or “Available for Sale”? These questions are just a sample of the pre-purchase analysis of an investment.
Q: What are CMO's, MBS's and ABS's?
A: CMO – Collateralized Mortgage Obligation -A bond that represents a partitioned ownership of a mortgage pool. CMOs are issued by a trust which holds mortgage-backed securities as collateral. The trust issues several different classes of CMOs, called tranches. Tranches have different maturities, coupons, and risks.
MBS - Mortgage Backed Security - A term used broadly to refer to a security backed by mortgages, including pass-through securities, pools, mortgage-backed bonds, and CMOs.
ABS - Asset Backed Security - A security that is collateralized, typically, by loans, leases, unsecured receivables, or installment contracts on personal property. Asset-backed securities are not permissible investments for state chartered natural person credit unions.
Q: Can I invest the credit union's assets in a part of a Master CD?
A: No. An investment from a Master CD is not permitted within the KDCU written investment guidelines. This type of investment can not be placed in the credit union’s name, therefore, it cannot be safekept at a bank, trust, or a corporate credit union.
Per the Investment Guidelines of the Kansas Department of Credit Unions, investments can only be safekept at a bank, trust, or a corporate credit union.
Q: Can I ask my member to pay a fee to skip-a-payment on their loan?
A: A credit union must ask for permission in writing to apply a skip-a-payment fee granted by the KDCU’s Administrator. K.S.A. 16a-2-503 does not allow a skip-a-payment fee as of 1994. However, a current Kansas law, in effect in 2005 (a Missouri parity law), does allow a credit union to ask in writing to the KDCU Administrator for permission to charge a fee for this service.
Q: Can I allow my member to pay a loan ahead?
A: Contractually, a loan cannot be paid ahead without arrangements made by the member with the credit union. Most loan contracts state a minimum monthly payment is required to be paid. Data systems that are not monitored properly let next due dates extend to the future when a member pays more than the required monthly payment. However, this procedure is not recommended.
Q: What is risk-based pricing in lending?
A: Risk based pricing in lending is used by some credit unions to determine the interest rate charged for a loan. The interest rate is determined based on the credit risk of the borrower and the characteristics of the collateral, if applicable. The credit risk of the borrower is usually determined by the borrower’s credit score as well as other factors developed by the lender. Characteristics of the collateral can include the type of collateral, the age of the collateral and others.
Q: Why should I use credit scoring and get credit reports on my members?
A: You should obtain a credit score and credit report to assist you in making your loan decision. The better the credit score the better the chance the member will repay the loan as agreed.
The credit report will provide you with information about the member’s credit history. The credit report will tell you how much the member owes to others in addition to the credit union and if the member is making loan payments on a timely basis as agreed. You can learn if any lender has been forced to take collection action or legal action to collect monies owed.
You can use the credit score in combination with the credit report as tools evaluate the likelihood the member will repay the loan, the appropriate interest rate, and in the case of unsecured loans the amount to be loaned.
Q: How risky is indirect consumer lending?
A: Indirect consumer lending can increase credit risk and operational risk if part of the lending underwriting process is performed by the indirect lending partner, such as an auto dealer, with whom the credit union has an indirect lending relationship. Some credit unions agree to have all of the underwriting performed by the partner. Other credit unions require all of the underwriting be performed by credit union loan officers, with only the application being done by the business. Each credit union contracts for its own agreements unique to its operational guidelines.
Q: What do I need to do before I start an indirect lending program?
A: Any credit union that is considering a significant new product or new service area must first notify the Kansas Department of Credit Unions. Before you start an indirect loan program, it may also be appropriate to seek legal counsel to ensure that any contractual agreements between the credit union and the indirect lending partner are in the best interests of the credit union. Additional due diligence may take into consideration the indirect lending partner’s reputation, the indirect lending partner’s trade area, the method of pricing your loan rates, the credit union’s underwriting standards and the amount of underwriting decisions the indirect lending partner can make. Typically, the indirect lending partner makes at least part of the underwriting process such as taking an application or checking for a consumer’s eligibility for membership in your credit union. Indirect lending is a relationship agreement between the credit union and the indirect lending partner and special considerations must be taken prior to entering into contractual agreement.
Q: Can the Credit Union participate in a loan?
A: Your credit union may participate in loans made to credit union members jointly with other credit unions, credit union organizations, financial institutions* or financial organizations*. You may only participate in loans that meet the written loan policies of the directors of your credit union.
(*The Kansas Statutes pertinent to credit unions are silent on the definition of financial institution or financial organization. The NCUA has defined “Financial Organizations” as “federally chartered or insured financial institutions, not to include insurance and finance companies, retirement and investment funds”.)
Q: Can the Credit Union participate in an out of state loan?
A: Your credit union may participate in an out of state loan to a credit union member jointly with other credit unions, credit union organizations, financial institutions* or financial organizations.* You may only participate in loans that meet the written loan policies of the directors of your credit union and you may only participate in such out of state loans if the written loan policies of the directors of your credit union permit the credit union to make such loans out of state.
Simply stated if your credit union’s loan policies do not permit the credit union to make out of state loans the credit union may not participate in an out of state loan even if the loan is of a type permitted by the credit union’s loan policy.
Industry best practices dictate the credit union should not make or participate in loans outside of its established trade area. Making or participating in loans from outside your credit union’s normal trade area introduces additional risk into the loan portfolio.
Your credit union may not be familiar with the current economic conditions and legal/regulatory requirements in the out of state area. You also will have to constantly monitor for and react to changes in the economy and legal/regulatory requirements in the out of state area.
*(The Kansas Statutes pertinent to credit unions are silent on the definition of financial institution or financial organization. The NCUA has defined “Financial Organizations” as “federally chartered or insured financial institutions, not to include insurance and finance companies, retirement and investment funds”.)
Q: When is my Call Report Due?
A: Call reports are due to your examiner by the 24th of the month following the end of each calendar quarter. The examiner and his or her address will be stated in the letter containing call report materials sent by the KDCU shortly before the end of each quarter. Remember, however, that on this date the call report must be reviewed and corrected as well as completed. The call report should initially be sent to arrive several days earlier for necessary checking and processing.
Q: What is the Kansas Department of Credit Unions Report of Officials and does it have to be completed?
A: The Kansas Department of Credit Unions Report of Officials is an official listing of the persons on the board of directors, supervisory committee, credit committee and certain members of the credit union staff. This document must be completed quarterly, including any changes in the listing of persons, on a quarterly basis. The signed report must be sent to the Kansas Department of Credit Unions with each quarterly call report.
Q: Where can I find help filing my Call Report?
A: For technical support, please call NCUA Customer Service at 1-800-827-3255 with any software questions.
For any other questions call the KDCU examiner to whom you will send the completed call report for review. The examiner’s name, phone number and E-mail address is listed on the letter from the KDCU.
Q: Who is responsible for ensuring that my Call Report is accurate?
A: State law requires the call report to be signed by the President/Chairman and Secretary of the Board of Directors under oath. There will be a “Special State Schedule” included in the mailing of call report materials that will need to be signed, notarized and returned to the KDCU with your call report. Do not hold up sending of the call report while waiting for signatures, include a note with the call report stating that the notarized signature page will be sent as soon as possible.
Q: Will the KDCU still accept a paper-copy of my Call Report instead of the electronic form?
A: The call report should be transmitted using the instructions provided with the call report and should be filed electronically, if at all possible. If you are not able to transmit electronically, a paper copy of the electronically completed and checked form may be accepted if mailed sufficiently early to allow the examiner time to review the data before the due date. The call report file will also be accepted on a CD, however floppy disks are no longer acceptable. The Kansas Department of Credit Unions strongly suggests that you file the form electronically due to the reliability, speed and accuracy of the electronic filing. You can contact the National Credit Union Administration or your examiner for assistance using your Call Report program.
Q: Is there still a Short-Form Call Report?
A: Starting with the June 30, 2006 call report cycle, all credit union will file the same call report regardless of the asset size of the credit union. Please refer to NCUA’s Letters to Credit Unions 06-CU-03 for more information.
Q: What is the Bank Secrecy Act and who is ultimately responsible?
The credit union’s board of directors, acting through senior management, is ultimately responsible for ensuring that the credit union maintains an effective BSA/AML internal control structure, including suspicious activity monitoring and reporting. The board of directors and management should create a culture of compliance to ensure staff adherence to the credit union’s BSA/AML policies, procedures, and processes.
Q: How much fixed assets can the credit union have?
A: Fixed assets are limited by statute to a maximum of 5% of total assets. Generally, fixed assets are classified as non-earnings assets because they do not produce income. Statute limits this to ensure safety and soundness as well as to ensure adequate operational efficiency. You can contact the Kansas Department of Credit Unions to discuss this requirement with the Administrator.
Q: What is the minimum level of Net Worth a credit union must maintain?
A: Natural-person credit unions are required to maintain a minimum level of net worth, consisting of reserves and undivided earnings, of at least 7%. Net worth is an accounting treatment that records the accumulation of accounting profits on the income statement. Net worth shows the financial strength of the credit union and also acts as an internal source of funding. Generally, higher net worth enables a company or a credit union to take more financial risk than a business with less net worth because the company can absorb losses and continue as a going concern.
Q: What are brokered deposits and are they allowed in Kansas?
A: A credit union may use a broker to purchase CDs and securities for investment purposes. A broker may be used for non-member deposits for liquidity purposes also. An annual review should be completed on each broker used and kept in the broker file. The investment policy should identify each approved broker to be used.
Q: How do I determine the adequacy of the ALLL account?
Loans should be pooled by like credit risk characteristics and a loss factor applied (based on historical charge-off to average loan balances) which then may be adjusted upward or downward for relevant (and documented) internal or external data.
NCUA guidance on the proper methodology to be used to calculate the adequacy of the ALLL account is contained in Letter to Credit Unions 02-CU-09 and the related Interpretive Ruling and Policy Statement (IRPS) 02-3.
Q: How do I account for repossessed collateral?
A: When the credit union takes possession of collateral and the borrower's obligation to the credit union has been canceled, then the fair value of the collateral should be transferred to “Assets Acquired in Liquidation of Loans” ( commonly account 707).
Assets so acquired should initially be recorded in this account at the cost of such assets at foreclosure which is the fair value of the asset foreclosed or repossessed. When the outstanding loan balance exceeds the fair value of the collateral at foreclosure, the remaining loan balance (the difference) should be charged off to the allowance for loan losses account.
Subsequent to foreclosure, the records should be adjusted periodically to reflect the asset at the lower of (a) fair value minus estimated costs to sell, or (b) cost at the time of foreclosure.
Q: What rules govern what investments I can invest the credit union's assets in?
A: Kansas Statute 17-2204(a) addresses this issue. Investment guidelines are established by written investment policies approved the credit union’s board of directors and are subject to the written Investment Guidelines of the Kansas Department of Credit Unions’ Administrator.
The next Credit Union Council Meeting is scheduled for September 25 at the Department of Credit Unions, 109 SW 9th Street, Suite 610, Topeka, KS 66612
|Department of Credit Unions 109 SW 9th Street Suite 610 Topeka, KS 66612 Phone: 785-296-3021 Fax: 785-296-6830 E-mail: email@example.com|