Some Privately Insured CUs Do Not Adequately Disclose Lack of Federal Insurance, GAO Says

WASHINGTON-The U.S. General Accounting Office found during a recent study that some privately insured credit unions are not “adequately” disclosing their private insurance status, a discovery that could heat up the private insurance debate all over again. “Some privately insured credit unions GAO visited did not adequately disclose that these institutions were not federally insured; as a result, depositors at these institutions may not be fully informed that their deposits are not federally insured,” the GAO report read. In surprise visits by GAO to 57 privately insured credit unions in Alabama, California, Illinois, Indiana, and Ohio, 37% (21) did not have required notices posted. Maryland, Nevada, and Idaho also have privately insured credit unions. Washington State, Montana, New Mexico, Oklahoma, Louisiana, Pennsylvania, New Jersey, New Hampshire, and Colorado permit private insurance, but are not home to any privately-insured credit unions. One of NAFCU’s arguments against allowing credit unions to carry private insurance was public ignorance of the difference between federal and private insurance and the implications that failure of the private insurer could have for federal insurance. American Share Insurance, the sole remaining private deposit insurer for credit unions, said that it did everything it could to educate its member credit unions about the disclosure requirements under the Federal Deposit Insurance Corporation Improvement Act of 1991. Debate over state chartered credit unions’ option for private insurance flared up last year when multi-billion dollar Patelco Credit Union converted to private insurance, by far the largest insurance conversion ever. In fact, Patelco was one of the credit unions interviewed for GAO’s study, according to Patelco Senior Vice President Anita Macias. “It’s really about disclosure and the impact on consumers. We’re in complete compliance and that’s why we thought [enforcement of Section 43] was fine,” Macias said. She added that Patelco prints a full disclosure on everything from newsletters to receipts to window and door stickers to its Web site. Faith Community United Credit Union is another privately insured credit union that would be affected by the enforcement of the law. When asked if the $8 million community development credit union is in compliance, CEO Rita L. Haynes said, “Yes it is as far as we’re aware. ASI sends us the information and we send it out to our members.” She added that she concurred with the GAO report that Section 43 should be enforced and the Federal Trade Commission is the agency to do it. The law requires that privately insured credit unions to tell the member on nearly every piece of paper they ever print that the institution is privately insured and no government will repay any funds lost (See sidebar for specifics on FDICIA disclosure requirements). However, where Section 43 of FDICIA gets tricky is that the FTC is charged with enforcing these disclosures, yet Congress has negated its own decree by refusing to fund its enforcement since it was signed into law. The FTC lobbied hard not to have to enforce Section 43. Twelve years ago, the agency claimed they lacked the manpower, expertise, and authority to ensure credit unions made these disclosures. The FTC made the same arguments to GAO during its recent study. “The GAO Report concludes that if Congress made some technical changes to Section 4 of the Federal Deposit Insurance Act.and lifted the appropriations ban, there is no reason why the FTC could not enforce it,” FTC wrote in a letter to GAO upon the conclusion of the study. “We respectfully disagree with the GAO Report’s conclusions and recommendations.” The FTC declined to comment beyond the letter. The agency also noted in interviews with GAO that it does not have jurisdiction over nonprofits or expertise in depository institutions. However, GAO suggested that “a less extreme interpretation” of the disclosures than the one the FTC presented would be more appropriate. GAO concluded that with some minor tweaking and clarification to the law, FTC’s legitimate concerns should be addressed. “Although institutions lacking federal insurance are chartered and regulated by the states, protecting consumers from confusion about the insurance of their deposits is consistent with the FTC’s consumer protection mission. Congress also determined that the federal agency specifically charged with protecting consumers against misleading or deceptive information practices-FTC-should ensure that the federal interest in proper disclosure is maintained.” Though no federal regulator seemed ideal, FTC caused the least conflict. GAO also looked at NCUA and FDIC as potential candidates to enforce the law. NCUA and FDIC both argued that they had no interest in non-federally insured institutions. Additionally the agencies said it could create confusion by “closely associating” private and federal insurance. Finally, NCUA pointed out that regulating its competition for insuring credit unions would create a clear conflict of interest. GAO recommended implementing Section 43 with FTC at the helm. The federal auditors suggested that Congress give FTC the authority to consult with FDIC and NCUA on the disclosure requirements; to coordinate with state regulators of non-federally insured credit unions to assist in enforcement of the disclosures; and to impose sanctions for violations of the disclosure requirements, among other things. Mixed Reactions While the FTC may not have been happy about the findings of GAO’s study, NCUA said it just confirms what the agency has been saying all along. “I am extremely pleased with the results of the GAO study on enforcement of the consumer protection provisions of FDICIA. As always, the GAO did an extremely thorough study and analysis, and their recommendations are consistent with NCUA’s long stated position that the consumer protection provisions of FDICIA should certainly be enforced, but any attempt to impose that enforcement role on NCUA would be a potential conflict for the agency and inconsistent with our role in a dual chartering system as the safety and soundness regulator of federal credit unions and as insurer of all federally-insured credit unions,” the statement read. Chairman Dollar added that he hoped Congress would make sufficient appropriations for the FTC to carry out the job. He also stated on a somewhat related issue that Congress should give FTC-not NCUA-authority over privately insured credit unions looking to join the Federal Home Loan Bank System as proposed in H.R. 1375, the Financial Services Regulatory Relief bill. The GAO acknowledged that NCUA and state regulators have created requirements similar to those in Section 43, which offer “some assurances” that parts of section 43 of FDICIA are being complied with, but they are not the same. On the other hand, ASI is scrambling to reinforce its education efforts. Upon hearing that the GAO was initiating its study, the company took the initiative to create new disclosure materials for its member credit unions. They were to be mailed out last week, according to ASI President and CEO Dennis Adams. These materials, which include a summary of the relevant portion of FDICIA, a Q&A, window and door stickers, counter stands, and other items, are available free of charge to ASI member credit unions. GAO’s study found that some previous window stickers from ASI were not in compliance. “I’m not surprised that there isn’t total compliance. It’s been 12 years since the law was passed,” Adams said. That was the last time ASI made a mass effort to educate its member credit unions, he explained. Adams added that every credit union that has joined since that time has been provided with free disclosure materials. “I was disappointed to see the high level of noncompliance,” he admitted, “but I think it can be easily resolved.Somebody needs to educate.” Adams said he believes that every privately insured credit union that intends to comply with the law should be able to within a year. In January, ASI made the formal decision to include the disclosures in its exam report. If a problem is noted, Adams said he expects the credit union to take corrective measures. However, ASI has no real enforcement mechanism as a regulator would. He said that ASI could add a compliance requirement to credit unions’ risk eligibility, but he has not decided yet whether to take the issue to ASI’s board of directors. ASI was found to be in full compliance with its duties regarding its audits CUNA, NAFCU, and NASCUS were all interviewed for the study and came out in support of FTC enforcement of the Section 43 requirements. Only NAFCU was opposed to private deposit insurance altogether, but supported its enforcement while they are in existence. “We believe this is an important consumer issue and now hope that Congress will instruct FTC to begin enforcing a law that has gone unenforced since 1991,” NAFCU President and CEO Fred Becker said. NASCUS Acting President and CEO Mary Martha Fortney said the group was pleased that GAO recommended that state regulators play a partnership role in enforcement. “It’s appropriate. Why? Because they’re the institutions chartered in the state,” she explained. [email protected]