Better Together: Recent FAQs on Mergers
By: Reginald Watson, Regulatory Compliance Counsel, NAFCU
Greetings Compliance Friends!
Following NCUA’s final rule on voluntary mergers earlier this year (covered in a previous NAFCU Blog), the NAFCU Compliance Team has received a number of merger-related questions on a variety of topics, so I thought it may be pertinent to merge round up a few for today’s blog. Here’s some food for thought before we get started:
Question 1 - If an individual is a member of both credit unions prior to a merger, will the amount of available share insurance need to be recalculated in their account at the surviving credit union?
Answer - This question does not come up often since it primarily concerns members who are close to the $250,000 share insurance limit and belong to two credit unions that are undergoing a merger or acquisition. In any event, NCUA does provide a general rule that separate share insurance coverage for these accounts would continue to apply for the six months immediately following the merger. Here is a brief excerpt from the regulation:
(f) Continuation of separate share insurance coverage after merger of insured credit unions. Whenever the liability to pay the member accounts of one or more insured credit unions is assumed by another insured credit union, whether by merger, consolidation, other statutory assumption or contract: The insured status of the credit unions whose member account liability has been assumed terminates, for purposes of this section, on the date of receipt by NCUA of satisfactory evidence of the assumption; and the separate insurance of member accounts assumed continues for six months from the date the assumption takes effect or, in the case of a share certificate, the earliest maturity date after the six-month period. In the case of a share certificate that matures within the six-month grace period that is renewed at the same dollar amount, either with or without accrued dividends having been added to the principal amount, and for the same term as the original share certificate, the separate insurance applies to the renewed share certificate until the first maturity date after the six-month period. A share certificate that matures within the six-month grace period that is renewed on any other basis, or that is not renewed, is separately insured only until the end of the six-month grace period.
12 CFR 745.2(f) (emphasis added).
Thus, members will have a six-month grace period following a merger to restructure their accounts before share insurance coverage ceases for the previous account. For share certificate accounts, this grace period is extended to the first maturity date after the six-month grace period.
Question 2 - When acquiring mortgage loans during a merger, does the newly established credit union have to report the denied loans of the former credit union for that calendar year?
Answer - This answer depends upon whether the surviving credit union is subject to HMDA reporting under Regulation C, as well as whether the credit unions were separately subject to HMDA reporting prior to the merger. In order to determine whether the surviving credit union meets the reporting thresholds of section 1003.2(g)(1)(iv) and is subject to HMDA reporting, the official commentary to Regulation C appears to indicate that the assets and lending activity for both institutions would be combined. See, 12 CFR Part 1003, Supp. I, comment 2(g)-3. Comment 4 of that same section of the commentary provides a list of scenarios describing the credit union’s reporting responsibilities in the calendar year following a merger or acquisition. These same guidelines are restated a bit more clearly in the FFIEC’s Guide to HMDA Reporting: Getting it Right! Here are some excerpts:
Reporting responsibility for the calendar year of a merger or acquisition.
The following discusses the applicability of Regulation C during the calendar year of a merger or acquisition:
1. If two institutions that are not subject to Regulation C merge but the newly formed or surviving institution is subject to Regulation C, no data collection is required for the calendar year of the merger.
(…)
3. If an institution that is subject to Regulation C and an institution that is not subject to Regulation C merge, and the surviving or newly formed institution is subject to Regulation C, for the calendar year of the merger, data collection is required for covered loans and applications handled in the offices of the institution that was previously subject to Regulation C. For the calendar year of the merger, data collection is optional for covered loans and applications handled in offices of the institution that was not previously subject to Regulation C.
5. If an institution that is subject to Regulation C and an institution that is not subject to Regulation C merge and the surviving or newly formed institution is not subject to Regulation C, data collection is required for covered loans and applications handled prior to the merger in the previously covered institution’s offices. After the merger date, data collection is optional for covered loans and applications handled in the offices of the institution that was previously covered.
(…)
7. If two or more institutions that are subject to Regulation C merge and the surviving or newly formed institution is also subject to Regulation C, data collection is required for the entire calendar year of the merger. The surviving or newly formed financial institution files either a consolidated submission or separate submissions for that calendar year.
FFIEC’s Guide to HMDA Reporting: Getting it Right!, at 14-16.
Question 3 - Following a recent merger, we are in the process of converting “old” credit cards from the former credit union to cards in our existing portfolio. If we encourage the cardholders to voluntarily apply for the new card, is the APR related to the existing balance on the “old” credit card “protected” under Regulation Z?
Answer - Section 1026.55 of Regulation Z provides a general prohibition on increasing credit card rates unless the increase fits one of the exceptions from that section, for example, the increase is in connection with a timely change in terms notice that meets the requirements of section 1026.9. Paragraph 55(c) also prohibits the application of an increased APR to transactions that occurred prior to the increase, creating a “protected balance” in such situations. Reg Z later seems to indicate that these protections continue to apply in the case of an acquisition or balance transfer at the same credit union, and says:
(d) Continuing application. This section continues to apply to a balance on a credit card account under an open-end (not home-secured) consumer credit plan after:
(1) The account is closed or acquired by another creditor; or
(2) The balance is transferred from a credit card account under an open-end (not home-secured) consumer credit plan issued by a creditor to another credit account issued by the same creditor or its affiliate or subsidiary (unless the account to which the balance is transferred is subject to §1026.40).
As you can see, there does not appear to be any carve-outs for situations where members voluntarily apply for a new card, and the protected balance rule appears to continue in application. In other words, if your credit union acquires credit card accounts in a merger or acquisition, or if the balance is transferred from one account to another account “by the same creditor or its affiliate or subsidiary,” the protections that are tied to the underlying balance continue to apply.
