LRB-3765/1
ARG:wlj:jf
2013 - 2014 LEGISLATURE
January 22, 2014 - Introduced by Representatives Craig, Bies, Brooks, Kahl,
Kapenga, Kaufert, Kooyenga, Krug, LeMahieu, Murphy, Sanfelippo,
Tauchen, Wright, Hintz and Zepnick, cosponsored by Senators Lasee,
Schultz and Grothman. Referred to Committee on Financial Institutions.
AB649,1,8
1An Act to repeal 215.26 (3) and 220.28;
to amend 13.92 (4) (c), 13.92 (4) (d),
213.92 (4) (e), 13.92 (4) (f), 35.93 (2) (b) 4., 35.93 (2) (c) 1., 35.93 (3), 35.93 (3) (e)
3(intro.), 35.93 (3) (e) 1., 186.098 (9m), 186.113 (7), 186.71 (1), 214.75 (4), 214.75
4(5) (a), 215.26 (4) (a), 220.285 (1), 227.01 (13) (intro.), 227.11 (2) (intro.) and
5227.27 (2); and
to create 13.92 (4) (bm), 186.118, 227.01 (13) (yv) and 227.265
6of the statutes;
relating to: rule-making procedures and modifying and
7repealing various rules promulgated by the Department of Financial
8Institutions.
Analysis by the Legislative Reference Bureau
Statutory treatments
Rule-making procedures
Current law sets forth a procedure for the promulgation of administrative rules
(rules). Generally, that procedure consists of the following steps:
1. The agency planning to promulgate the rule prepares a statement of the
scope of the proposed rule, which the governor and the agency head must approve
before any state employee or official may perform any activity in connection with the
drafting of the proposed rule.
2. The agency drafts the proposed rule, together with an economic impact
analysis, plain language analysis, and fiscal estimate for the proposed rule, and
submits those materials to the Legislative Council Staff for review.
3. Subject to certain exceptions, a public hearing is held on the proposed rule.
4. The final draft of the proposed rule is submitted to the governor for approval.
5. The final draft of the proposed rule, together with an economic impact
analysis, plain language analysis, and fiscal estimate for the proposed rule, are
submitted to the legislature for review by one standing committee in each house and
by the Joint Committee for Review of Administrative Rules.
6. The proposed rule is filed with the Legislative Reference Bureau (LRB) for
publication in the Wisconsin Administrative Code (code) and the Wisconsin
Administrative Register (register), and, subject to certain exceptions, the rule
becomes effective on the first day of the first month beginning after publication.
Under this bill, if a bill that repeals or modifies a rule is enacted, the ordinary
rule-making procedures under current law do not apply. Instead, the LRB must
publish the repeal or modification, in the code and the register, and the repeal or
modification, subject to certain exceptions, takes effect on the first day of the first
month beginning after publication.
Treatments of administrative rules
This bill modifies and repeals various rules promulgated by the Department of
Financial Institutions (DFI), as described below.
Authorized activities of credit unions
1. Incidental powers activities
Current statutes specify various powers and authorized activities of a credit
union, including authority to sell insurance, annuities, and related products, to
participate with other lenders in loans of any type that the credit union could make
by itself, and to exercise all powers necessary and proper to carry out the purposes
of the credit union. In addition, a credit union may undertake any activity, exercise
any power, or offer any financially related product or service that any other provider
of financial products or services in this state may undertake, exercise, or provide if
the Office of Credit Unions (OCU) in DFI, by rule, authorizes the activity, power,
product, or service for credit unions. OCU also has general authority, subject to the
approval of the Credit Union Review Board, to promulgate rules authorizing credit
unions to make any loan or investment or exercise any right, power, or privilege
afforded federally chartered credit unions.
Under current OCU rules authorizing Wisconsin-chartered credit unions to
engage in incidental activities in the same manner that these activities are available
to federally chartered credit unions, a credit union may offer and enter into debt
cancellation contracts and debt suspension agreements with customers, subject to
various requirements and restrictions. Under a debt cancellation contract or debt
suspension agreement, a credit union agrees to cancel or suspend, respectively, all
or part of a customer's obligation to repay a loan from the credit union upon the
occurrence of a specified event. Under other OCU rules, Wisconsin-chartered credit
unions are authorized to engage in loan participation agreements with other credit
unions and financial institutions in the same manner that these participation
agreements are available to federally chartered credit unions, subject to various
requirements and restrictions.
This bill repeals the chapters of OCU's rules relating to credit unions' debt
cancellation contracts, debt suspension agreements, and loan participation
agreements. The bill creates statutory provisions relating to incidental powers of
credit unions. Under the bill, OCU must publish on DFI's Internet site a list of
activities and powers incidental to the business of a credit union that are authorized
for federally chartered credit unions as of the effective date of the bill. In addition
to any other activity or power authorized by statute, a Wisconsin-chartered credit
union may engage in any listed activity or exercise any listed power. After the
effective date of the bill, if any activity or power incidental to the business of a credit
union that is not listed becomes authorized for federally chartered credit unions,
within 30 days after the activity or power becomes authorized, OCU must make a
determination as to whether the activity or power should also be authorized for
Wisconsin-chartered credit unions. In making this determination, OCU must
consider the degree to which the following apply with respect to the activity or power:
1) it is necessary, convenient, or useful for effectively carrying out the mission or
business of a credit union; 2) it is the functional equivalent or logical outgrowth of
activities or powers that are part of the mission or business of a credit union; and 3)
it involves risks similar in nature to those already assumed as part of the business
of the credit union and it is not likely to be detrimental to the overall safety and
soundness of the credit union. If OCU determines that the activity or power
authorized for federally chartered credit unions should also be authorized for
Wisconsin-chartered credit unions, OCU must add the activity or power to the list
and a Wisconsin-chartered credit union may then engage in the activity or exercise
the power. OCU is not required to engage in rule making in developing, publishing,
or updating this list.
2. Credit union service organizations
Under current statutes, subject to certain limitations, a credit union may invest
in credit union service organizations (CUSOs) that are approved by OCU and are
organized primarily to provide goods and services to credit unions, credit union
organizations, and credit union members. A CUSO may provide specified types of
services related to the routine daily operations of credit unions, including checking
and currency services; accounting services; clerical and management services;
electronic transaction services; insurance, securities, or real estate brokerage
services; loan support services; record retention services; and trust and other
fiduciary services. In addition, OCU may expand this list of CUSO services
authorized for all credit unions upon written request of any credit union.
Current OCU rules establish certain requirements and limitations with respect
to CUSOs and credit unions that invest in them, including requirements related to
corporate separation between a credit union and a CUSO, notice and legal advice
required before investing in a CUSO, the amount of the permissible investment in
a CUSO, conflicts of interest between credit union officials and a CUSO, and a
CUSO's financial reporting duties to OCU.
This bill repeals the chapter of OCU's rules relating to CUSOs but does not
modify any statute relating to CUSOs.
3. Investment in deposit accounts and the securities of certain institutions
Under OCU's current rules relating to permissible investments by credit
unions, a credit union may invest in deposit accounts of federally insured banks and
savings and loan associations (insured financial institutions) if the aggregate
investment per financial institution does not exceed the greater of the institution's
deposit insurance limit or one-half of the unimpaired balance of the credit union's
regular reserve, which is an amount the credit union sets aside to cover losses.
This bill allows a credit union to make investments in deposit accounts of
insured financial institutions that exceed this aggregate investment limit if OCU
approves the investment.
Under OCU's current rules, credit unions may make investments in securities
issued by hospitals, churches, dioceses, and similar institutions (institutional
investments), subject to various restrictions. Among the restrictions on these
investments, an individual credit union may not invest more than $50,000 in
securities issued by any one individual institution without OCU's prior approval.
This bill increases this investment limit from $50,000 to $100,000 and provides
that this amount increases biennially to adjust for inflation.
4. Time deposits
Under OCU's current rules, a credit union's board of directors must establish
the dividend periods applicable to each classification of member savings and must
establish the credit union's policy with regard to maturities and minimum
denominations for each classification of certificates of deposit. A certificate of deposit
is defined as a savings deposit evidenced by a non-negotiable instrument that
contains certain information, including the principal amount of the deposit and
dividend rate, the expiration date at which time the certificate of deposit is due and
payable, and any penalties that may be imposed for early withdrawal. Certain
requirements apply with respect to certificates of deposit, including notice to the
depositor prior to maturity setting forth the terms and options available with regard
to continuation or renewal of the certificate. The credit union's board of directors
must also establish the credit union's policy with regard to the penalties for early
withdrawal from certificate of deposit accounts.
This bill modifies OCU's rules so that these provisions currently applicable only
to certificates of deposit apply to all time deposits, not just certificates of deposit. The
modified rules do not define the term "time deposit."
5. Acquisition of conditional sales contracts of members
Under current statutes, a credit union may purchase or acquire conditional
sales contracts or similar instruments (conditional sales contracts) executed by
credit union members.
Under OCU's current rules, credit unions may purchase or acquire conditional
sales contracts executed by their members, although if the credit union has assets
of less than $1,000,000, it may do so only with the prior, written approval of OCU.
These rules also include certain requirements and restrictions with respect to
conditional sales contracts. The term "conditional sales contract" is not defined by
statute or by rule.
This bill modifies both the statutes and the rules to replace the term
"conditional sales contracts" with the term "interests in credit sales transactions."
Control procedures for credit unions
1. Audits in lieu of examination
Under current statutes, the board of directors of a credit union must hire a
certified public accountant (CPA) to conduct a comprehensive annual audit of the
records, accounts, and affairs of the credit union, or the board may instead appoint
an auditing committee to annually audit the records, accounts, and cash of the credit
union and to verify member accounts. OCU may order an independent audit at the
credit union's expense if OCU finds an annual audit to be unsatisfactory. Also under
current statutes, at least once every 18 months, OCU must examine the records and
accounts of each credit union (periodic examination).
Under OCU's current rules, OCU may accept an audit report of a CPA who is
not an employee of the credit union in lieu of all or a portion of the OCU's periodic
examination. For OCU to accept an examination from the CPA of a credit union, the
CPA must satisfy certain requirements, including that the CPA submit an additional
special report on forms provided by OCU that are the regular examination forms
completed by OCU staff examiners during the course of their routine examinations.
This bill modifies OCU's rules to allow OCU to accept, in lieu of a periodic
examination, an audit report of a CPA who is an employee of the credit union. The
CPA's examination must include a determination that the credit union is operating
in accordance with generally accepted accounting principles, rather than regular
accepted credit union accounting principles as specified in OCU's current rules. The
bill also repeals the requirement that the CPA submit additional special reports on
OCU forms.
2. Reserves for member business loans with potential losses
Current OCU rules require credit unions to adopt member business loan
policies and impose various requirements and restrictions on member business
loans. A member business loan is, with certain exceptions, a loan in which the
borrower intends to use the proceeds for commercial, corporate, or agricultural
purposes or for purposes involving investment property or a business venture. With
exceptions, there is a total aggregate limit on the amount of a credit union's member
business loans as well as a per-member limit. A credit union must classify member
business loans for which there is a potential loss as substandard, doubtful, or loss,
according to the degree to which the loss is likely. For these loans classified as
substandard, doubtful, or loss, the credit union must establish a reserve of the
following minimum amounts: 10 percent of the outstanding balance of a
substandard loan, subject to variation; 50 percent of the outstanding balance of a
doubtful loan; and 100 percent of the outstanding balance of a loss loan.
This bill repeals OCU's rules requiring credit unions to classify member
business loans for which there is a potential loss as substandard, doubtful, or loss
and to establish a specified reserve amount for each of these classified member
business loans.
Record retention by financial institutions
Under current statutes, a credit union, state bank, savings and loan association
(S&L), or savings bank may have its records reproduced by a photographic or optical
imaging process that accurately and permanently reproduces the originals and then
dispose of the originals after first obtaining the written consent of, respectively, OCU
or the Division of Banking (division) in DFI. The reproduced records are thereafter
treated the same as originals.
Under this bill, after having its records accurately reproduced in this manner,
a credit union, state bank, S&L, or savings bank is not required to obtain the written
consent of OCU or the division to thereafter dispose of the originals.
Under current statutes, a state bank or an S&L may destroy or dispose of its
records that have become obsolete after first obtaining the written consent of the
division.
This bill repeals these statutory provisions relating to destruction of obsolete
records.
Under current statutes, the division must, by rule, prescribe periods of time for
which savings banks must retain records and after the expiration of which the
savings bank may destroy those records.
Under this bill, the division must by rule prescribe standards by which savings
banks must retain records and may thereafter destroy those records.
Under current rules of OCU and the division, each credit union, savings bank,
and S&L must retain its records in a manner consistent with prudent business
practices and in accordance with other provisions of state and federal law. For credit
unions, the record retention system utilized must be able to produce accurate and
verifiable records and include an index to the retained forms. Each credit union,
savings bank, and S&L must retain its records for at least the minimum period
specified in a particular publication of the Financial Managers Society, Inc. (FMS).
A credit union, savings bank, or S&L may destroy its records at the end of the
applicable minimum retention period specified in the applicable FMS publication
unless a longer retention period is required by other state or federal law. In the
destruction of records, the credit union, savings bank, or S&L must take reasonable
precautions to assure the confidentiality of information in the records.
The division's current rules for state banks include a detailed schedule setting
forth minimum record retention periods according to record type. A state bank may
destroy its records after the applicable minimum retention period has expired.
This bill modifies the rules of OCU and the division to eliminate the
requirement that credit union, savings bank, and S&L records must be retained for
at least the minimum period specified in the applicable FMS publication.
The bill also eliminates the division's rule establishing a schedule of required
minimum retention periods, according to record type, for state banks. The bill
specifies that, subject to the requirement that records be retained in a manner
consistent with prudent business practices and in accordance with other provisions
of state and federal law, a credit union, state bank, S&L, or savings bank may destroy
its records. In the destruction of records, the credit union, state bank, S&L, or
savings bank must take reasonable precautions to assure the confidentiality of
information in the records. For state banks, S&Ls, and savings banks the bill
specifies that the record retention system must be able to accurately produce records,
and for credit unions the bill eliminates the requirement that the record retention
system include an index to retained forms.
Technical corrections
The bill makes other minor, clarifying, technical, or nonsubstantive changes to
OCU's rules.
For further information see the state fiscal estimate, which will be printed as
an appendix to this bill.
The people of the state of Wisconsin, represented in senate and assembly, do
enact as follows: