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It looks very promising for two bills set to be signed by Michigan Gov. Jennifer Granholm that would allow credit unions to become members of a network that currently allows municipalities and schools to invest in certificates of deposit at FDIC-insured banks.Michigan Senate bill 195 and House bill 4397 have cleared several legislative hurdles and as of this writing, were headed to the governor’s office for signature, according to Marcia Hune, director of legislative affairs at the Michigan Credit Union League. Introduced by Michigan Sen. Tony Stamas (R-Midland), the Senate bill involves local governments. The House bill, authored by Rep. Jeff Mayes (D-Bay City), would allow school districts to invest in credit union certificates of deposit.While the state’s credit unions can serve as parking spots for CD for schools and municipalities, Hune said they are not considered members of the Certificate of Deposit Account Registry Service program because the network restricts membership to FDIC-insured banks. Formed in 2003 by the Promontory Interfinancial Network in Arlington, Va., the program has more than 2,900 financial institutions as members. Several hundred credit unions are depositors, which are different than being members, said Phil Battey, vice president of legislative and public affairs at Promontory Interfinancial. The Bank of New York Mellon provides record keeping, settlement, issuance and custody support for the network.When a large deposit is placed with a member of CDARS, that institution uses the network to place funds into CDs issued by banks. This occurs in increments of less than the standard FDIC insurance maximum to ensure that both principal and interest are eligible for full FDIC insurance, according to CDARS.Through a matching system, network members exchange funds. This transaction occurs on a dollar-for-dollar basis, so that the equivalent of the original deposit comes back to the institution and can stay within the local community. With consent, members can also receive fee income instead of matching deposits. In either case, the full amount of the original deposit becomes eligible for complete FDIC protection.“Last year, banks opened up two acts to use those deposits and then turn them around to invest in CDARS,” Hune said. “The law didn’t allow credit unions to go the extra step to use CDARS. We wanted to be included but there was not enough time to make the change.”Battey said over the years, CDARS has explored how credit unions could become members of the network but the hurdle has been the FDIC restriction.“The common bond requirement is problematic, and it is an obstacle in a legal sense,” Battey said. “For a depositor, if it’s a credit union, there’s not a common bond with FDIC banks.”Hune said if credit unions are not allowed to become CDARS members, there has been talk with CUNA and the Promotory Interfinancial to possibly develop an exchange strictly for credit unions. Battey confirmed the network is in “very, very early” discussions about forming an intra-credit union equivalent.“We don’t know if there is a demand for this from credit unions, but we are certainly working to find out,” Battey said.With access to full insurance, CDARS members do not have to deal with surety bonds and collateralization requirements, according to the program’s Web site (www.cdars.com). There also is no need to manually consolidate account statements or interest disbursements on a recurring basis or footnote uninsured deposits in financial statements.“Credit unions in Michigan can take deposits from schools. Some states don’t have that luxury,” Hune said. “We always argue that credit unions are safe and secure and no one has lost their [CDs] so far. It’s also a convenience issue. Credit unions can help consumers turn around and invest their money.”–msamaad@cutimes.com

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