Bellco CU Wins UBIT Challenge

April 26, 2010

Bellco CU Wins UBIT Challenge

Last month the U.S. District Court in Colorado ruled in favor of Bellco Credit Union, Greenwood Village, Colo., about limits on the Internal Revenue Service’s authority to collect unrelated business income taxes (UBIT) on several products. 

The court ruled income derived from the sale of credit life and disability insurance on direct or indirect loans is substantially related to the credit union’s tax-exempt purpose of promoting thrift, and is, therefore, not subject to UBIT.

The court also ruled income from the sale by a third-party vendor of accidental death and dismemberment (AD&D) insurance to Bellco’s members is royalty income and also is exempt from UBIT. The two elements of the ruling that went against Bellco stemmed from insufficient recordkeeping rather than the principles at issue in the case.

The April ruling was based on a December 2009 trial. Before the trial, the same judge ruled that Bellco’s commissions from vendor sales of financial products and services such as stocks and annuities to its members were “substantially related” to its tax-exempt purpose and, therefore, not subject to UBIT.

The Bellco rulings enhance last year’s victory in which a jury ruled that Community First Credit Union, Appleton, Wis., was exempt from UBIT on income from credit life insurance, credit disability insurance, and GAP (guaranteed automobile protection) coverage. 

The IRS has until later this summer to appeal; it did not appeal its loss in the Wisconsin case. 

Bellco brought the lawsuit with the full support of the UBIT Steering Committee, made up of Credit Union National Association (CUNA), CUNA Mutual, the American Association of Credit Union Leagues, and the National Association of State Credit Union Supervisors.  

The moral of the story first: A credit union needs to closely scrutinize a Chapter 13 plan filed by any member who has a student loan to see if the plan proposes to discharge the student loan’s principal or interest. If so, object to the plan and request a hearing on the “undue hardship” issue.

A student loan isn’t dischargeable in bankruptcy unless the debtor can prove “undue hardship” to the court, and what constitutes undue hardship is extremely rigid. Recently, the U.S. Supreme Court in United Student Aid Funds Inc. v. Espinosa unanimously affirmed a bankruptcy court’s authority to discharge a student loan debt even though the debtor didn’t seek a court hearing on the issue.

The creditor received notice from the bankruptcy court of the debtor’s bankruptcy plan that provided for repayment of the student loan principal and discharge of the interest, and failed to object to the debtor’s plan before the bankruptcy court confirmed the plan.

The Supreme Court stated the bankruptcy court’s failure to find an undue hardship before confirming the debtor’s plan was a legal error.

But the debtor’s confirmed plan remains enforceable and binding on the creditor because, even though it had notice, it failed to object to the plan, request a hearing on the undue hardship issue, or file a timely appeal.

The Federal Reserve Board has released rules restricting the fees and expiration dates that may apply to gift cards. The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 mandates the rules, which are effective Aug. 22, 2010.

The consumer/recipient must be given clear and conspicuous disclosures about the fees.

The new rules prohibit dormancy, inactivity, and service fees on gift cards unless the consumer hasn’t used the certificate or card for at least a year and no more than one fee is charged a month.

Expiration dates for funds reflected on a gift card must be at least five years after the date the card was issued or five years after the date when funds were last loaded.The rules generally cover cards used to buy goods at specific merchants and network-branded cards.

Credit Union Magazine
will cover the compliance requirements for credit unions in next month’s “Compliance Matters.”

The National Credit Union Administration’s (NCUA) Letter to Credit Unions No. 10-CU-03 provides credit unions with the supervisory letter to examiners on agency concerns about poor management of large concentration of various asset classifications in relationship to a credit union’s size and net worth.

NCUA lists concerns it has about credit union balance sheet concentrations in:

• Fixed-rate real estate loans;

• Member business loans;

 Loan participations;

• Construction and development loans; and

• Investments in mortgage-related securities.

The letter discusses expectations for appropriate risk management and states “senior management needs to implement procedures and controls to effectively adhere to and monitor compliance with established policies and strategies.”

For NCUA’s Letter No. 10-CU-03 on concentration risk, visit (select “resources and publications”).

Compliance Resources

Two free resources are available to keep you up to speed on compliance developments:

• “What’s new in compliance?” This daily update at (select “compliance”) lists new regulatory proposals from federal agencies, CUNA’s summaries of proposed and final regulations, and legislative developments.

You’ll find a brief summary of each issue, or you can click through for more details.

• Consumer Compliance Outlook, published by the Federal Reserve Bank of Philadelphia each quarter highlighting consumer issues.

The First Quarter 2010 issue includes a summary of the Fed’s new credit card regulation, a Q&A on the new Regulation E overdraft restrictions, and a regulatory alert about the Federal Trade Commission’s rule on advertising “free credit reports.”

Sign up at (select “bank resources,” and then “publications”).

Training Calendar

• Regulatory Compliance Introductory eSchool: May 5-July 14.

• Consumer Lending Regulations Webinar: May 5 and May 12.

• Mortgage Lending Regulations Webinar: May 19 and May 26.

• NCUA Requirements and Guidance Webinar: June 2 and June 16.

• Deposit Account Regulations Webinar: June 23 and June 30.

• Pressing Credit Union Compliance Issues audio conference: June 24.

• General Operations Regulations Webinar: July 7 and July 14.

• Regulatory Compliance Update eSchool: Sept. 1-Oct. 13.

Visit, and enter the name of the event in the “event finder.”


Q After the Federal Reserve Board’s amendments to Regulation E go into effect this summer, can a credit union continue to charge a transfer fee for moving funds from another account or from a line of credit to cover an overdraft triggered by an ATM or one-time debit transaction without the member first providing his consent (opting in) under the new regulation?

A Yes. Transferring funds from other accounts aren’t covered by the definition of “overdraft services,” so the member doesn’t have to provide his consent. And while the Fed has broadly prohibited fees from being charged without an opt-in, the agency has assured CUNA that properly disclosed transfer fees can continue to be charged to the account experiencing the overdraft. (Remember, the Reg E rules go into effect July 1, 2010, for new accounts and August 15, 2010, for existing accounts.)

Q Does the Reg Z final rule that becomes effective July 1, 2010, require a summary table or Schumer box on applications for open-end loans other than credit card accounts?

A No, Reg Z doesn’t require a summary table or Schumer box on or with applications for open-end loans beyond credit card applications. The summary table is required only on or with credit card applications and solicitations. As of July 1, 2010, however, a new summary table will be required in the account-opening agreement for all open-end loans except HELOCs. The look of the new summary table in account-opening agreements is similar to the table currently required for credit card applications, but the content is somewhat different. (See CU Mag 4/10, “No time to relax just yet.”)



Compliance effective dates:

 June 1, 2010: Federal Trade Commission’s enforcement of the Fair and Accurate Credit Transactions (FACT) Act identity theft red flag rules (applicable to state-chartered credit unions; federal credit unions have been subject to these rules since 2008).

• July 1, 2010: Regulation E rules restricting overdraft fees for ATM and one-time debit transactions for new accounts (applicable to all credit unions).

July 1, 2010: Regulation Z’s open-end lending rules (applicable to all credit unions).

• July 1, 2010: FACT Act’s accuracy and direct dispute provisions (applicable to all credit unions).

 Aug. 15, 2010: Regulation E overdraft rules for existing accounts (applicable to all credit unions).

 Aug. 22, 2010: Credit Card Accountability, Responsibility, and Disclosure (CARD) Act’s gift card rules and rules on the amount of fees and penalties and interest rate reviews on credit cards.

Visit and select “compliance,” and then “e-Guide.”