SB520: Bill Text

2013 Senate BILL 520

January 27, 2014 - Introduced by Senators Lasee, Grothman and Schultz, cosponsored by Representatives Craig, Kooyenga, Kahl, Krug, LeMahieu, Murphy, Sanfelippo, Bies, Brooks, Kapenga, Tauchen, Kaufert and Wright. Referred to Committee on Financial Institutions and Rural Issues.

SB520,1,8 An Act to repeal 215.26 (3) and 220.28; to amend 13.92 (4) (c), 13.92 (4) (d), 13.92 (4) (e), 13.92 (4) (f), 35.93 (2) (b) 4., 35.93 (2) (c) 1., 35.93 (3), 35.93 (3) (e) (intro.), 35.93 (3) (e) 1., 186.098 (9m), 186.113 (7), 186.71 (1), 214.75 (4), 214.75 (5) (a), 215.26 (4) (a), 220.285 (1), 227.01 (13) (intro.), 227.11 (2) (intro.) and 227.27 (2); and to create 13.92 (4) (bm), 186.118, 227.01 (13) (yv) and 227.265 of the statutes; relating to: rule-making procedures and modifying and repealing various rules promulgated by the Department of Financial Institutions.

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:

SB520,1 Section 1. 13.92 (4) (bm) of the statutes is created to read:

SB520,7,11 13.92 (4) (bm) If 2 or more rules filed under s. 227.20 or modified under s. 227.265 affect the same unit of the Wisconsin administrative code without taking cognizance of the effect thereon of the other rules and if the legislative reference bureau finds that there is no mutual inconsistency in the changes made by each such rule, the legislative reference bureau shall incorporate the changes made by each rule into the text of the unit and document the incorporation in a note to the unit. For each such incorporation, the legislative reference bureau shall include in a correction bill a provision formally validating the incorporation. Section 227.27 (2) is not affected by printing decisions made by the legislative reference bureau under this paragraph.

SB520,2 Section 2. 13.92 (4) (c) of the statutes is amended to read:

SB520,7,14 13.92 (4) (c) The legislative reference bureau may insert in the Wisconsin administrative code a note explaining any change made under par. (b) or (bm).

SB520,3 Section 3. 13.92 (4) (d) of the statutes is amended to read:

SB520,8,2 13.92 (4) (d) Sections 227.114, 227.116, 227.135 , and 227.14 to 227.24 do not apply to any change made by the legislative reference bureau under par. (b) or (bm).

SB520,4 Section 4. 13.92 (4) (e) of the statutes is amended to read:

SB520,8,5 13.92 (4) (e) The legislative reference bureau shall prepare and keep on file a record of each change made under par. (b) or (bm).

SB520,5 Section 5. 13.92 (4) (f) of the statutes is amended to read:

SB520,8,8 13.92 (4) (f) The legislative reference bureau shall notify the agency involved of each change made under par. (b) or (bm).

SB520,6 Section 6. 35.93 (2) (b) 4. of the statutes, as affected by 2013 Wisconsin Act 20, is amended to read:

SB520,8,13 35.93 (2) (b) 4. Copies of all rules filed with the legislative reference bureau under s. 227.20 (1) or modified under s. 227.265 since the compilation of the preceding register, including emergency rules filed under s. 227.24 (3).

SB520,7 Section 7. 35.93 (2) (c) 1. of the statutes, as affected by 2013 Wisconsin Act 20, is amended to read:

SB520,8,18 35.93 (2) (c) 1. Each chapter of the Wisconsin administrative code that has been affected by rules filed with legislative reference bureau under s. 227.20 (1) or modified under s. 227.265, in accordance with sub. (3) (e) 1.

SB520,8 Section 8. 35.93 (3) of the statutes is amended to read:

SB520,9,8 35.93 (3) The legislative reference bureau shall compile and deliver to the department for printing copy for a register which shall contain all the rules filed under s. 227.20 or modified under s. 227.265 since the compilation of rules for the preceding issue of the register was made and those executive orders which are to be in effect for more than 90 days or an informative summary thereof. The complete register shall be compiled and published before the first day of each month and a notice section of the register shall be compiled and published before the 15th day of each month. Each issue of the register shall contain a title page with the name "Wisconsin administrative register", the number and date of the register, and a table of contents. Each page of the register shall also contain the date and number of the register of which it is a part in addition to the other necessary code titles and page numbers. The legislative reference bureau may include in the register such instructions or information as in the bureau's judgment will help the user to correctly make insertions and deletions in the code and to keep the code current.

SB520,9 Section 9. 35.93 (3) (e) (intro.) of the statutes, as affected by 2013 Wisconsin Act 20, is amended to read:

SB520,9,15 35.93 (3) (e) (intro.) The legislative reference bureau shall incorporate into the appropriate chapters of the Wisconsin administrative code each permanent rule filed with the legislative reference bureau under s. 227.20 (1) or modified under s. 227.265 and, for each chapter of the administrative code affected by a rule, do all of the following:

SB520,10 Section 10. 35.93 (3) (e) 1. of the statutes, as affected by 2013 Wisconsin Act 20, is amended to read:

SB520,9,23 35.93 (3) (e) 1. Publish the chapter in the appropriate end-of-month register in accordance with the filing deadline for publication established in the rules procedures manual published under s. 227.15 (7) or, in an end-of-month register agreed to by the submitting agency and the legislative reference bureau , or, in the case of a rule modified under s. 227.265, in the end-of-month register for the month in which the bill modifying the rule is enacted.

SB520,11 Section 11. 186.098 (9m) of the statutes is amended to read:

SB520,10,3 186.098 (9m) Participation loans. Subject to rules prescribed by the office of credit unions, a A credit union may participate with other lenders in a loan of any type that the credit union may otherwise make.

SB520,12 Section 12. 186.113 (7) of the statutes is amended to read:

SB520,10,8 186.113 (7) Conditional sales contracts Acquiring interests in credit sales transactions. Purchase or acquire conditional sales contracts or similar instruments executed by interests in credit sales transactions involving credit union members.

SB520,13 Section 13. 186.118 of the statutes is created to read: