Parts of a proposed Federal Reserve regulation that would require credit unions to reduce the hold time on certain checks could increase the incidents of fraud and threaten safety and soundness, according to letters from CUNA, NAFCU and several credit unions.
The proposed rule, which increases next business day availability for certain funds and would reduce the time financial institutions could hold payment on checks they find suspicious, was mandated by last year's financial overhaul bill.
CUNA Regulatory Counsel Dennis Tsang wrote that decreasing the amount of time a financial institution can extend the hold time from five days to two days would increase fraud because smaller institutions need more time to handle problem checks.
He also criticized the proposal to decrease the total allowed hold times for checks deposited at nonproprietary ATMs from 11 business days to six days. He noted that longer hold times are needed because these deposits often "cannot be verified and are often in remote locations."
He recommended that any reduction on hold times be phased in to minimize fraud risk.
NAFCU Associate Director, Regulatory Affairs Dillon Shea took issue with the proposal to eliminate the ability of individual financial institutions to place a longer hold on clearing certain checks if they have suspicions about the issuer.
Virginia Credit Union President/CEO Beverley Rutherford criticized the provision that would eliminate "refer to maker," as the sole reason for returning a check.
Rutherford wrote that if credit unions cannot solely use that reason, which institutions use when they have determined that a check cannot be paid but there may be sufficient funds on deposit, they don't have a way to tell merchants that they have to contact the account owner for additional information before attaining a warrant or selling the item for collection.
Incentive Compensation
While credit unions contend that the NCUA's proposed rules to limit incentive-based compensation plans are too restrictive, several labor unions and consumer groups want them to be even tougher.
Although most of the practices that are addressed in comment letters don't apply to practices at credit unions, the groups call for expanding the three-year mandatory deferral of some of the compensation to five years. This change is needed to "ensure that incentive compensation takes into account an institution's performance over an entire business cycle and to prevent opportunities for gaming the payouts," wrote AFL-CIO Investment Office Director Daniel F. Pedrotty.
Under the three-year deferral, only one-sixth of executives' pay would be at risk for the full period and this doesn't create adequate risk exposure, according to a comment letter from Americans for Financial Reform, a coalition of 250 national, state and local organizations. The American Federation of State, County and Municipal Employees raised similar points.
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