The Good, The Bad and The Ugly

April 10, 2014 at 8:50 am 2 comments

The Good

Good things come to those who wait. . .and wait. . .and wait.  Nearly four years after deciding not to appeal federal court rulings holding that the IRS wrongly tried to tax certain state chartered credit union activities, the IRS has finally gotten around to issuing a memorandum to its examiners confirming that state chartered credit unions are exempt from most UBIT taxes. 

It’s been a while since UBIT was a big issue, so here’s a quick refresher. The Unrelated Business Income Tax (UBIT) taxes the activities of not-for-profit tax-exempt organizations which are not substantially related to the activities for which an organzation was given tax exempt status.  Federal credit unions are explicitly exempt from this tax.  In two cases brought in federal district court and decided in 2009 and 2010, credit unions successfully argued that contrary to the IRS’s opinion, most of the products and services commonly offered by state chartered credit unions are exempt from the UBIT tax.including the sale of credit life and credit disability insurance, GAP auto insurance, ATM “per-transaction fees FROM MEMBERS,” interest on loans and the sale of checks from a check printing company to members. 

The decisions and the recently released memorandum are not a complete victory for state-chartered credit unions.  For instance, the sale of automobile warranties, accidental death and dismemberment insurance, life insurance and ATM “per-transaction fees FROM NON MEMBERS” are subject to UBIT.  I’ve included a link to the IRS memorandum so you can take a look at the entire list.  All in all, though, this is the biggest victory for credit unions in the last decade. 

The Bad

Credit unions are mainly concerned with the enormous power the CFPB has to promulgate consumer regulations.  But to really get a feel for just how powerful the Bureau is, you should keep in mind that it also has the authority to take legal action against financial institutions engaging in deceptive financial practices.  The latest institution to run afoul of the CFPB is Bank of America, which has agreed to pay approximately $727 million in refunds and $20 million in fines in relation to allegations that it engaged in deceptive practices when selling 1.4 customers credit cards and so-called “add-on services.”  A separate agreement was reached with the OCC.

 Among the sins highlighted by the Bureau were the fact that some consumers were led to wrongly believe that the first 30 days of coverage for certain add-on credit card services were free and aggressive enrollment practices which led consumers to believe that they were simply obtaining additional information about a product when in fact they were agreeing to buy it.  These enforcement actions provide a pretty good signal of where the CFPB thinks additional regulation is necessary, so even though Bank of America’s misdeeds may not affect you today, they may impact the work load of your compliance officer tomorrow.

The Ugly

Just how bad is it for mortgage lenders out there?  According to the Wall Street Journal, mortgage originations in February “fell to their lowest level in 14 years due to the months long plunge in refinancing activity and weak demand for loans to purchase new homes.”  The Journal also reports that the share of mortgage applications for refinances hit their lowest level since 2009.  Remember, this is all taking place as the FED is winding down its bond buying program and tougher lending regulations are taking effect.  Unless we see a huge surge of consumer confidence and economic growth in the near future, this is shaping up as one heck of a depressing year for the mortgage market.

On that happy note, have a nice day!

Entry filed under: Compliance, Legal Watch, Mortgage Lending, Regulatory. Tags: , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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