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SAN FRANCISCO – The Bank Secrecy Act is taking a toll on U.S. credit unions with one-third having been written up for violations, and while “this is not the end of the world” it does show corrective steps need to be taken, according to a top NCUA compliance officer. Addressing a session at CUNA’s Future Forum entitled, “Regulatory Hot Issues: What Examiners are Focusing On,” Elizabeth Habring, NCUA program officer in the Office of Examination and Insurance, said many of the cited CUs have already sought help, particularly on the biggest examiner finding relating to “validation of internal controls” and independent testing. While also repeating earlier NCUA concerns about sub-prime lending and due diligence, the NCUA staffer focused on BSA compliance as a “high priority item” before Congress which has already gone after banks with big fines. Credit unions, she warned, “are next on the list.” On subprime third-party lending, Habring said the agency has continuing concerns about whether CUs are adequately evaluating the capabilities of vendors and scrutinizing contracts for rate changes. In addition, while subprime lending can be a “fabulous” product for some CUs, there are regulatory warning signs over contract wording on sharing of risks. She said this is an issue on auto lending where it may be unclear whether the dealer was authorized to start making loans “with credit scores below 650″ while the contract states 649. Examiners will be watching for a failure to accommodate such changes, she said. On disaster recovery plans, the NCUA official said the Katrina disaster has highlighted several new problem areas, “We’ve already seen where a Gulf Coast credit union had their backup across the street and it got flooded too,” said Habring suggesting that kind of precaution is inadequate as well as some out-of-state vendor also hit by flooding. There have been problems with unlimited debit lines up to $500 on ATMs as well as regulatory concerns over poor “or no communication” with members after a breakdown, said Habring. During her talk focusing on BSA, Habring engaged in an exchange with one CEO in the audience, Harriet May, of GECU in El Paso, Texas who said tellers and other members of her staff have become “obsessed” by BSA rules in “red flagging suspicious transactions.” The ID process has made staff “immobile” asking what can be done. Habring replied that CUs like hers are showing due diligence in complying and that examiners “will be reasonable” in taking cognizance of CUs which strive to meet the letter of the law. But regulators will and have come down hard on banks and CUs which willfully ignore BSA rules, she said. Habring also challenged comments of fellow panelist, CUNA chief economist Bill Hampel regarding a prevailing 1% ROA for CUs, with Habring suggesting that in certain cases depending on local conditions “we can look at 35 or 20 basis points” below that mark. -

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