Organization and Operations of Federal Credit Unions

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: NCUA is proposing to amend its lending regulation to permit

federal credit unions to advance money to members to cover account

deficits without having a credit application from the member on file if

the credit union has a written overdraft policy.

DATES: The NCUA must receive comments on or before November 29, 1999.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail

or hand-deliver comments to: National Credit Union Administration, 1775

Duke Street, Alexandria, Virginia 22314-3428, or you may fax comments

to (703) 518-6319. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Senior Staff

Attorney, or Regina M. Metz, Staff Attorney, in the Division of

Operations, Office of General Counsel, at the above address or

telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

The Federal Credit Union Act does not specifically address a

federal credit union's (FCU's) authority to pay or honor a share draft

written that will result in an overdrawn account. NCUA's longstanding

position has been that an FCU's payment of an overdraft as a financial

accommodation to a member constitutes a loan or line of credit to a

member.

When an FCU pays a member's overdraft, the FCU uses its money to

pay a member's third party obligations. The overdraft is a debt that

the FCU expects the member to repay. Because the FCU is making a loan,

it must comply with the NCUA's lending regulation requiring a credit

application to be on file for each borrower supporting the decision to

make a loan or establish a line of credit. 12 CFR 701.21(c)(3).

A number of federal credit unions and trade associations contend

that federal credit unions are at a competitive disadvantage because

they are unable to cover a member's overdrafts absent a prearranged,

written agreement for the extension of credit. The NCUA Board believes

this argument has merit although there may be some safety and soundness

concerns with extending credit to a member without a written lending

agreement. Overdrafts which are unsupported by an agreement and for

which there is no credit analysis represent an unsecured obligation of

the member to the credit union. In general, a credit union undertakes a

greater level of risk with this activity than with a loan which has

undergone a thorough credit analysis. However, after careful review,

the NCUA Board is proposing to amend Sec. 701.21(c)(3) to permit a

credit union to advance money to a member to cover his or her account

deficit without having a credit application from the borrower on file

if the credit union has a written overdraft policy. The NCUA Board

believes that a written overdraft policy will offset safety and

soundness concerns and prevent insider abuses. The Board is proposing

that a credit union's written overdraft policy must: (1) Address how

the credit union will honor overdrafts; (2) set a cap on the total

dollar amount of all overdrafts the credit union will honor; (3)

establish a time limit not to exceed ten business days for a member

either to deposit funds or obtain an approved loan from the credit

union to cover each overdraft; (4) limit the number and dollar amount

of overdrafts the credit union will honor per member; and (5) establish

the fee and interest rate, if any, the credit union will charge members

for honoring overdrafts.

The NCUA Board requests comments from the public on whether the

regulation should impose additional restrictions on overdrafts by

credit union employees or officials. The NCUA Board also requests

comments on whether NCUA should set limits on the total dollar amount a

credit union can lend to honor overdrafts as well as the total dollar

amount per member. The NCUA Board is also requesting comments on

whether the regulation should require a federal credit union to have in

its overdraft policy a certain number of days after which it will write

off any overdraft for which the member has not either repaid the credit

union or obtained an approved loan. Finally, the NCUA Board requests

comments on whether the ten-day requirement for the member to cover the

overdraft is appropriate. The risk of nonpayment of an overdraft that

is not covered by the member within such a time period increases

dramatically.

While the proposed regulation is under consideration, the NCUA

intends to continue its current supervisory approach to overdrafts that

are paid as

[[Page 52695]]

an accommodation to members. The approach has been that it will not

take exception to FCUs that permit overdrafts as long as there are no

safety and soundness concerns or evidence that the practice is being

abused or otherwise used as a means of circumventing other regulatory

requirements or giving preferential treatment to insiders.

Finally, in proposing this rule, NCUA is not directing or

encouraging credit unions to replace using written overdraft agreements

with members with a written overdraft policy. In fact, because written

overdraft agreements function essentially as a lending agreement that

becomes operational in the event of an overdraft, they are a preferable

way of addressing the safety and soundness concerns presented by

overdrafts.

B. Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis

to describe any significant economic impact any proposed regulation may

have on a substantial number of small entities (primarily those under

$1 million in assets). The NCUA has determined and certifies that this

proposed rule, if adopted, will not have a significant economic impact

on a substantial number of small credit unions. Accordingly, the NCUA

has determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

The NCUA Board has determined that the proposed notice and

disclosure requirements in Sec. 701.21 constitute a collection of

information under the Paperwork Reduction Act. NCUA is submitting a

copy of this proposed rule to the Office of Management and Budget (OMB)

for its review.

The proposed rule requires a federal credit union that advances

money to a member to cover his or her account deficit without having

the member's credit application on file to have a written overdraft

policy. The policy must: (1) Address how the credit union will honor

overdrafts; (2) set a cap on the total dollar amount of all overdrafts

the credit union will cover; (3) establish time limits for a member to

deposit funds to cover each overdraft; (4) limit the number and dollar

amount of overdrafts the credit union will honor per member; and (5)

establish the fee and interest rate, if any, the credit union will

charge members for covering overdrafts.

The written policy requirement is necessary to insure safety and

soundness in the credit union industry and protect the interests of

credit union members where a federal credit union provides overdraft

protection to a member without having his or her credit application on

file.

The NCUA Board estimates that it will take an average of four hours

to comply with this written policy requirement. The NCUA Board also

estimates that 1000 federal credit unions will write overdraft policies

so the total annual collection burden is estimated to be approximately

4000 hours.

The Paperwork Reduction Act of 1995 and OMB regulations require

that the public be provided an opportunity to comment on information

collection requirements, including an agency's estimate of the burden

of the collection of information. The NCUA Board invites comment on:

(1) Whether the collection of information is necessary; (2) the

accuracy of NCUA's estimate of the burden of collecting the

information; (3) ways to enhance the quality, utility, and clarity of

the information to be collected; and (4) ways to minimize the burden of

collection of information. Comments should be sent to: OMB Reports

Management Branch, New Executive Office Building, Room 10202,

Washington, D.C. 20503; Attention: Alex T. Hunt, Desk Officer for NCUA.

Please send NCUA a copy of any comments you submit to OMB.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. This proposed rule makes no significant

changes with respect to state credit unions and therefore, will not

materially affect state interest.

C. Agency Regulatory Goal

NCUA's goal is clear, understandable regulations that impose a

minimal regulatory burden. We request your comments on whether the

proposed amendment is understandable and minimally intrusive if

implemented as proposed.

List of Subjects in 12 CFR Part 701

Credit, Credit unions, Reporting and recordkeeping requirements

By the National Credit Union Administration Board on September

16, 1999.

Becky Baker,

Secretary of the Board.

For the reasons set forth in the preamble, the National Credit

Union Administration proposes to amend 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

1. The authority citation for part 701 continues to read as

follows:

Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,

1761b, 1766, 1767, 1782, 1784, 1787, and 1789.

Section 701.6 is also authorized by 15 U.S.C. 3717.

Section 701.31 is also authorized by 15 U.S.C. 1601 et seq.; 42

U.S.C. 1981 and 3601-3610.

Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

2. Amend Sec. 701.21 by revising paragraph (c)(3) to read as

follows:

Sec. 701.21 Loans to members and lines of credit to members.

* * * * *

(c) * * *

(3) Credit applications and overdrafts. Consistent with policies

established by the board of directors, the credit committee or loan

officer shall ensure that a credit application is kept on file for each

borrower supporting the decision to make a loan or establish a line of

credit. A credit union may advance money to a member to cover an

account deficit without having a credit application from the borrower

on file if the credit union has a written overdraft policy. The policy

must: address how the credit union will honor overdrafts; set a cap on

the total dollar amount of all overdrafts the credit union will honor

consistent with the credit union's ability to absorb losses; establish

a time limit not to exceed ten business days for a member either to

deposit funds or obtain an approved loan from the credit union to cover

each overdraft; limit the number and dollar amount of overdrafts the

credit union will honor per member; and establish the fee and interest

rate, if any, the credit union will charge members for honoring

overdrafts.

* * * * *

[FR Doc. 99-25397 Filed 9-29-99; 8:45 am]

BILLING CODE 7535-01-U