[Federal Register Volume 59, Number 223 (Monday, November 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28364]
Federal Register / Vol. 59, No. 223 / Monday, November 21, 1994 /
[[Page Unknown]]
[Federal Register: November 21, 1994]
VOL. 59, NO. 223
Monday, November 21, 1994
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 707
Truth in Savings
AGENCY: National Credit Union Administration.
ACTION: Final rule; interpretation.
-----------------------------------------------------------------------
SUMMARY: The NCUA Board is publishing its official staff commentary to
Part 707 of the NCUA Rules and Regulations (Truth in Savings). The
commentary applies and interprets the requirements of Part 707 and is a
substitute for individual staff interpretations. The commentary
incorporates much of the guidance provided when the regulation was
adopted, and addresses additional questions that have been raised about
the application of its requirements. In addition, the Board is
implementing a provision of the Riegle Community Development and
Regulatory Improvement Act of 1994, exempting accounts of
unincorporated business associations from coverage of Part 707. A minor
housekeeping amendment is also made to Part 707.
DATES: This document is effective on January 1, 1995.
Compliance with Appendix C to Part 707 is optional until May 22,
1995.
FOR FURTHER INFORMATION CONTACT:
Martin S. Conrey, Staff Attorney, Office of General Counsel, telephone
(703) 518-6540; Elizabeth Whitehead, Region I, telephone (518) 464-
4180; Gini L. Corso, Region II, telephone (703) 838-0401; Joe W.
Ostrowidzki, Region III, telephone (404) 396-4042; Michael J.
Schneider, Region IV, telephone (708) 245-1000; Annette K. Moore,
Region V, telephone (512) 482-4500; and Bruce Lum, Region VI, telephone
(510) 825-6125.
SUPPLEMENTARY INFORMATION:
(1) Background
The purpose of the Truth in Savings Act (``TISA'') (12 U.S.C. 4301
et seq.) is to assist members in comparing share and deposit accounts
offered by credit unions and other depository institutions. TISA
requires credit unions to disclose fees, the dividend or interest rate,
the annual percentage yield, and other account terms whenever a member
requests the information and before an account is opened. Fees and
other information also must be provided on any periodic statement the
credit union sends to the member. Rules are set forth for share and
deposit account advertisements and advance notices to account holders
of adverse changes in terms. TISA restricts how credit unions must
determine the account balance on which dividends or interest are
calculated. TISA is implemented by part 707 of the NCUA's Rules and
Regulations (``part 707'') (12 CFR part 707), which becomes effective
on January 1, 1995, for most credit unions. TISA authorizes the
issuance of official staff interpretations of the regulation.
(2) Rule Amendments
The Riegle Community Development and Regulatory Improvement Act of
1994, included a provision amending TISA. The amendment changes the
definition of account:
(1) Account.--The term ``account'' means any account intended
for use by and generally used by consumers primarily for personal,
family, or household purposes that is offered by a depository
institution into which a consumer deposits funds, including demand
accounts, time accounts, negotiable order of withdrawal accounts,
and share draft accounts.
12 U.S.C. 4313(1). The Conference Report to the Act clarifies the
intent of this amendment:
Section 332 defines the term ``account'' for purposes of [TISA]
as an account used by consumers primarily for personal, family, or
household use. The Conferees intend this section to provide a
business purpose exemption similar to that provided in the Truth in
Lending Act. Under this provision, accounts of unincorporated
businesses (i.e., generally, non-profit entities) are exempt from
coverage under [TISA].
H.R. Conf. Rep. No. 103-652, 103d Cong., 2d Sess. 179 (1994). In order
to implement the letter and intent of this new legislation, the Board
is amending the definitions of the terms ``account'' (707.2(a)) and
``member'' (7072(q)) in Part 707, as well as other relevant references
to unincorporated association accounts (Proposed Commentary, comment
2(a)-3 has been removed from the final commentary). The FRB has already
adopted similar changes to Regulation DD. 59 FR 52657 (October 19,
1994).
In addition, a typographical error has been removed from section
707.6(b)(3). The redundant phrase ``dollar amounts of the'' has been
removed; so that the sentence now reads: ``The fees shall be itemized
by type and dollar amounts.''
The Board is adopting these rule amendments without notice and
comment. The Administrative Procedure Act provides that notice and
opportunity for public comment are not required if the Board finds that
notice and public comment are unnecessary or would be contrary to the
public interest. 5 U.S.C. 553(b)(B). The Board believes such a finding
is appropriate in this case. The Congress has eliminated a class of
accounts from Truth in Savings coverage, and the amendments merely make
that change. In light of the Congress' action, the Board has no
discretion with regard to the regulatory change; which is required by
law and essentially ministerial. The other amendment removes a
confusing redundancy in the rule. These amendments are technical in
nature and not subject to interpretation. For these reasons, the Board
has determined that publishing a notice of proposed rulemaking and
providing opportunity for public comment for the following amendments
is unnecessary and would be contrary to the public interest.
(3) Commentary
On August 3, 1994, the Board published for comment a proposed
commentary to Part 707 (59 FR 39486). The commentary is designed to
provide guidance to credit unions in applying the regulation to
specific transactions and is a substitute for, and a supplement to,
individual staff interpretations. The Board received 47 comments: 3
from national trade associations; 14 from state credit union leagues; 1
from a state credit union supervisor; 2 from state-chartered credit
unions; 21 from federal credit unions; 1 from a credit union data
processor; 1 from a credit union consultant; 2 from law firms; 1 from
an insurance company; and 1 from a bank holding company. Commenters
generally supported the proposal.
The Board contemplates updating the commentary periodically to
address significant questions that arise. Due to the special needs of
small, nonautomated credit unions, and for the reasons explained by the
Board in the Final Rule adopted at the July Board meeting, the Board
has decided to extend the compliance date of part 707 until January 1,
1996 for credit unions that are not automated and are under $2 million
in assets as of December 31, 1993. 59 Fed. Reg. 39425 (August 3, 1994).
In large measure, the commentary incorporates supplementary
information accompanying prior rulemakings, and reflects the views
expressed therein without substantive change. (See final rule published
on September 27, 1993 (58 FR 50394), and final rule, corrections and
correcting amendments, published on March 22, 1994 (59 FR 13435).) The
commentary also addresses issues that have arisen since the publication
of the regulation and technical suggestions or concerns raised by
commenters. NCUA's proposed commentary was published before the
publication of the FRB's final commentary to Regulation DD. 59 FR
40217. NCUA's final commentary adopts many of the changes made by the
FRB in their final commentary. The commentary also reflects NCUA
staff's understanding of the FRB's interpretations which have not been
publicly published. The commentary, for the most part, does not repeat
information provided in part 707. The Board also notes, in response to
seven commenters' requests for a delayed compliance date for all credit
unions, that most credit unions have already been granted 14 months by
the Board to get ready for TISA and part 707. In addition, credit
unions can take advantage of the FRB's Regulation DD, and its
compliance by other depository institutions, which was implemented in
June of 1993. 58 FR 271 (January 5, 1993). The Board notes that the
commentary makes no substantive changes to the actual regulation, but
merely provides guidance. Therefore, the Board declines to extend the
compliance date of the rule; but, to provide credit unions time to
comply with the guidance provided in this commentary, and to provide
parity to the compliance period provided by the FRB when it promulgated
the final Regulation DD commentary, the Board has made compliance with
this commentary optional until a period of six months after publication
in the Federal Register, at which time compliance with the commentary
shall be mandatory.
To avoid unnecessary detail, the discussion accompanying the final
commentary does not individually mention technical amendments that
clarify the proposed text but make no substantive change in meaning.
On December 6, 1993, the Federal Reserve Board (``FRB'') published
a proposal to amend the regulation's rules for calculating the annual
percentage yield for accounts that send dividends or interest prior to
maturity (58 FR 64190). (See also the notice extending the comment
period published on January 13, 1994, 59 FR 1921.) This FRB proposed
rule was withdrawn on May 11, 1994 (59 FR 24376). In its place, a new
FRB proposed rule was published on May 11, 1994 (59 FR 24378), as
amended on July 11, 1994 (59 FR 35271). The FRB amendments focus on two
issues: a desire for the annual percentage yield to reflect the time
value of money, and the concern of compliance costs and the impact on
depository institutions if the proposed rule is adopted. The NCUA Board
is delaying action regarding any adoption of similar amendments to part
707 until the completion of the FRB's rulemaking.
Section 707.1 Authority, Purpose, Coverage and Effect on State Laws
(b) Purpose
One commenter, a trade association for thrifts, correctly commented
that the purpose of TISA was to enhance consumer shopping of depository
accounts at all financial institutions--credit unions, thrifts, and
banks, and urged the NCUA Board to stress this in the commentary. While
the commenter is correct, the NCUA Board notes that the purpose is
already correctly stated in Sec. 707.1(c) of the rule, and that the
purpose of the commentary is to enhance and explain the rule. Since
this matter is already clearly covered in the rule, the Board has
decided not to repeat it in the commentary. In this same vein, the
commenter requested that the NCUA Board encourage credit unions to
institute deposit, as opposed to share, accounts in order to provide
uniformity of accounts for consumers. The Board does not agree with
this comment for many reasons. First, the FCU Act and many state acts
require credit unions to have share accounts instead of deposit
accounts, and to change these laws is beyond the authority of the
Board. Secondly, the members' equity, expressed in share accounts, is a
major defining characteristic of credit unions, and has served the
credit union movement well throughout its history. Thirdly, the Board
does not believe that credit union uniformity in all respects with
other financial institutions has been proven to be a desirable goal.
While many other financial institutions have been faltering, credit
unions, due to their uniqueness, have been growing better and stronger.
The membership structure, represented by share accounts, has kept them
close to their members and enabled them to provide services unavailable
on the same terms from other entities. ``Not for profit, not for
charity, but for service'' is a motto that characterizes the entire
credit union movement. For these reasons, the Board declines the
commenter's suggestion.
(c) Coverage
In response to questions raised regarding applicability of the rule
to United States-chartered credit unions with overseas branches or
offices, the Board would like to clarify that the rule does cover such
operations, if accounts at such locations are either insured, or
insurable, by the National Credit Union Share Insurance Fund (NCUSIF).
In addition, if any foreign-chartered credit unions were to establish
and maintain branch operations in the United States under the North
American Free Trade Agreement (NAFTA), if accounts at such foreign-
chartered branches were insured or insurable by the NCUSIF, those
operations would also be subject to the coverage of part 707. For this
reason, NCUA deleted a reference to state-chartered and federally-
chartered credit unions in comment 1(c)-1.
(d) Effect on State Laws
One national trade association commenter suggested that the Board
should adopt an additional appendix to Part 707 similar to Appendix C
to Regulation DD, entitled ``Effect on State Laws.'' 12 CFR Part 230,
App. C. Regulation DD's Appendix C addresses inconsistent state
requirements and provides procedures for institutions seeking
preemption determinations from the FRB. After receipt of a preemption
request, the FRB generally will issue a Federal Register notice of its
intent to make a preemption determination, and provide an opportunity
for public comment. Notices of final preemption determinations are also
to be published in the Federal Register. The commenter stated that NCUA
had not shown any uniqueness reasons for varying from the FRB in not
adopting a similar appendix for Part 707; or at least by adopting more
guidance in the commentary as to the preemption standards to be used,
and means for providing an opportunity to comment by the affected
states and other interested parties. The commenter also pointed out
that by allowing affected states and other interested parties to
comment, that the impact of any preemption determination could be
minimized upon the state. This is in accord with federal policy, as
enunciated in Executive Order No. 12612. Therefore, the Board has
decided to adopt changes in the commentary to provide preemption
standards, and an informal notification process to affected states,
allowing sufficient time and opportunity for comment, before issuing
any preemption determinations under Part 707. These changes are made in
comments 1(d)-1 through 4. Four commenters requested that the
requirement for the credit union requesting a preemption determination
demonstrate a compliance burden be deleted. One commenter believed that
the requirement was reasonable, and should be retained. The Board notes
that demonstration of a burden is a caselaw prerequisite for a finding
of preemption. Therefore, the Board has not modified comment 1(d)-2.
Section 707.2--Definitions
(a) Account
Comment 2(a)-1 provides examples of accounts subject to the
regulation. The FRB, as did NCUA, proposed to narrow the regulation's
coverage of trust accounts individual retirement accounts (IRAs) and
simplified employee pension (SEP) accounts, to minimize compliance
burdens for institutions. Many FRB commenters supported the FRB's
general approach, but questioned whether the regulation should exclude
accounts held by individuals pursuant to informal trust arrangements
such as ``Totten'' or payable on death (POD) trusts. These commenters
noted the purpose of a Totten trust is to avoid probate proceedings to
transfer funds remaining in an account upon an accountholder's death.
It was also noted that the account's signature card may be the sole
evidence of the trust relationship. The FRB commenters suggested, and
the FRB agreed, that consumers opening Totten and POD trust accounts be
afforded the protections of TISA and Regulation DD. Fourteen NCUA
commenters agreed with the FRB's approach. The NCUA Board concurs, and
the commentary reflects this approach.
Comment 2(a)-3 in the proposed commentary was removed to reflect
the amendments made in Part 707 to implement the Riegle Community
Development and Regulatory Improvement Act of 1994. As discussed
previously, this change exempts unincorporated association accounts
from coverage of TISA and Part 707. As a result, proposed comment 2(a)-
3 is not incorporated into the final commentary. This change was also
requested by thirteen commenters. Comment 2(a)-2(vii) adds
unincorporated nonbusiness association accounts as being exempt from
the coverage of part 707, as required by the new legislation.
Fifteen commenters, including two national trade associations,
requested guidance regarding permissible synonyms for various types of
accounts. For instance, whether credit unions could interchangeably use
the term ``checking'' for ``share draft''; or the term ``certificate of
deposit'' for ``term share.'' It is the opinion of the Board that the
chief overriding factor to the use of synonyms is whether it is
accurate and not misleading. The key consideration is whether a ``share
account'' could be confused with being a ``deposit account,'' or vice
versa. Generally, if a disclosure uses the correct legal term of the
account once, and the synonym is accurate, the use of the synonym is
permissible. For example, a disclosure stating that an account is a
``share draft'' account, that equates ``share draft'' with
``checking,'' which has a neutral (neither share not deposit)
connotation will be permissible. However, it is never permissible to
equate a share account with a deposit account. For example, it is
impermissible to call a ``share certificate'' a ``certificate of
deposit,'' though both legally are ``term share'' accounts for TISA and
Part 707 purposes. Similarly, it is impermissible to refer to term
share accounts as either ``time deposits'' or ``time accounts,'' which
are terms with inaccurate and misleading meanings in the term share
context of part 707. The correct use of synonyms is provided in comment
2(a)-5.
(b) Advertisement
Comment 2(b)-1 illustrates the scope of commercial messages
considered to be advertisements. The FRB, as did NCUA, proposed that
advertisements would not include direct oral discussions conducted in
person regarding a specific account. Many FRB commenters urged the FRB
to expand the interpretation to include telephone conversations, but
the FRB declined. The FRB believes face-to-face discussions allow
prospective customers to learn easily and quickly about basic terms of
the account (thus, fulfilling the purpose of the advertising
disclosures). Also, the FRB stated that at any time during a face-to-
face conversation, consumers may request and receive written
disclosures at that time. Thus, the FRB commentary clarifies that
except for information about an existing account, commercial messages
delivered via telephone or voice response machines are advertisements.
NCUA proposed that telephone conversations initiated by a member or
potential member about an account would not be considered an
advertisement. Proposed comment 2(b)-1. Two commenters, including a
national trade association comments, requested that NCUA maintain this
comment in its final commentary. NCUA has kept this provision in the
final commentary, though it seems at variance with the FRB. The Board
is mindful that NCUA's rule must be ``substantially similar'' to the
FRB, except where modifications are supported by credit union
uniqueness reasons or the limitations upon which dividends are paid.
Unlike other financial institutions, many credit unions rely upon
volunteer staffs who have careers outisde of the financial institutions
area. To expect volunteers to follow the technical, complex advertising
requirements while on the telephone to their colleagues, friends and
neighbors, constituting their fellow members, is unreasonable.
Furthermore, it places an additional burden upon the volunteers for
oral disclosures, which generally will already have been made, or will
be made, in written disclosures. Therefore, after careful review and
application of NCUA's TISA authority, and finding that sufficient
uniqueness grounds exist for the NCUA Board to grant a variance from
the FRB's position, the NCUA Board adopts the position taken in the
proposed commentary as comment 2(b)-2(ii). Of course, telephone
conversations remain subject to the requirements for oral responses to
inquiries. 12 CFR 707.3(e).
One commenter inquired as to what requirements telephone response
machines must follow. Telephone response machines are subject to the
electronic media exemption of Sec. 707.8(e)(1), and NCUA's treatment of
such machines is identical to that of the FRB in Regulation DD. See
comment 8(e)(1)(iii)-1. Another commenter requested guidance regarding
whether messages on ATM or other computer screens were subject to the
electronic media exemption. They are. The coverage of the electronic
media exemption is discussed at comment 8(e)(2)(i)-1.
(f) Bonus
Five commenters criticized the example of $25 being offered to a
parent or custodian to open an account for a minor in proposed comment
2(f)-2. The commenters stated that under state laws the parent or
custodian will often be a joint accountholder on the minor's account.
The Board, wishing to accurately reflect state laws, has deleted this
example from the commentary.
Two commenters requested a clarification regarding whether payment
of an annual membership fee or dues (e.g., such as payment of a
membership fee to the National Association of Retired Credit Union
Persons (NARCUP) for senior credit union members) would be considered a
bonus. A sufficient showing was made that such membership dues payments
are not made to open, renew, or maintain an account in the credit
union, but instead are payments made to a third party (e.g., NARCUP) as
a benevolent gesture to a certain group of credit union members (e.g.,
seniors, with regard to NARCUP). For these reasons, the NCUA Board
finds that such payments of an annual membership fee are not bonuses;
and a clarification has been made to comment 2(f)-3(v).
Like the FRB, the NCUA has clarified comment 2(f)-4 discussing the
exclusion from bonuses of items of de minimis value ($10 or less). (See
26 CFR 1.6049-5(a)(2) published by the Internal Revenue Service (IRS),
which discusses the fair market value of property received.) One law
firm commenter noted that the IRS citation provided by the FRB may not
provide a complete picture of the tax consequences of bonuses. The NCUA
Board agrees and has deleted the IRS citation from the final comment.
Credit unions are strongly advised to consult their own tax attorneys,
accountants, or consultants regarding the tax consequences of the
accounts they offer, as such matters are outside of the jurisdiction of
NCUA.
Eleven NCUA commenters, including a national trade association
commenter, like many FRB commenters, expressed concern about potential
violations for failing to disclose as a bonus early in the year an
individual item of de minimis value deemed to be a bonus when
aggregated with another de minimis item given in a separate promotional
program involving the same account later in the year. Comment 2(f)-5
provides guidance about aggregating only the market value of items
offered for the same promotional program.
Seven commenters, including a national trade association commenter,
inquired whether the provision of free share drafts or checks would be
considered a bonus. After consultation with the FRB, NCUA has clarified
that provision of free share drafts or checks, whether provided to all
members, or only to certain groups, such as minors or seniors, would be
considered the waiver of a fee and not a bonus. This is reflected in
comment 2(f)-6(ii). Another commenter requested that free meals given
to the membership at an annual meeting be included as an example of a
bonus, however, under Sec. 707.2(r), such items are considered ``non-
dividend membership benefits.''
One commenter asked that the Board clarify whether the granting of
a higher dividend rate on an account if the member elects or uses
certain services offered by the credit union (i.e., ATM card, direct
deposit, other packaged or linked account terms) would not be
considered a bonus, based on the exclusion of dividends from the
definition of bonus. The Board confirms this in comment 2(f)-6(vii).
Nor, based on definitional reasons, would such higher dividends be
considered an extraordinary dividend; this is confirmed in comment
2(m)-1.
(i) Dividend and Dividends
The Board has clarified in comment 2(i)-1, that state law
determines the nature of an account for state-chartered credit unions.
This was generated in response to two commenters requesting
clarification regarding whether federal or state law determined the
nature (share or deposit) of accounts offered by state-chartered credit
unions. The Board stresses that this is solely a matter of state law,
as expressed in state statutes, regulations, interpretive orders, or by
any other official means. NCUA will not involve itself in
determinations of whether an account offered by a state-chartered
credit union is a share or deposit account, but will rely upon
applicable state law and the opinion of the relevant state supervisory
authority. Similar changes were made in comments 2(p)-1 and 2,
concerning the definition of interest.
Ten commenters, including one national trade association, lamented
that FCUs would not be able to offer fixed-rate accounts, due to the
dividend rate setting process described in comment 2(i)-1 through 3.
The NCUA Board wishes to stress that part 707 does not require FCUs to
offer only variable-rate accounts. FCUs may offer fixed-rate accounts
as long as the FCU, by contract, agrees to give at least 30 days
advance written notice of decreases in the initially disclosed dividend
rate. However, like a prospective rate set on a variable-rate account,
if FCUs offer a fixed-rate account, the NCUA Board believes that, as
discussed in comment 2(i)-3, every effort should be made in order to
pay the prospective fixed-rate disclosed. The fact that a prospective
rate is disclosed on a fixed-rate account, instead of a variable-rate
account, does not change the nature of the dividend setting process for
share accounts. To clarify this point, language has been added to
comment 2(i)-1. Nor does NCUA believe that it is appropriate to counsel
credit unions to make their accounts variable-rate, as opposed to
fixed-rate accounts, as requested by a few commenters. The NCUA Board
has no intention of limiting flexibility available under TISA and Part
707; the number, type, and terms of accounts are decisions within the
proper province of each credit union's board of directors and not the
federal government.
Ten commenters believed that proposed comment 2(i)-2 promulgated a
substantive federal dividend-setting process methodology for all credit
unions. The comment is set forth as guidance only, and was not meant to
substantively alter any contrary state laws. Therefore, the Board has
modified the final comment to use nondirective language. In addition,
sample dividend-setting resolutions are also provided in comment 2(i)-
4, to provide guidance to the boards' of directors of credit unions.
The resolution provided in comment 2(i)-4(i) may be used when the
dividend rate is declared after the close of a dividend period. The
resolution provided in comment 2(i)-4(ii) may be used when the dividend
rate is prospectively set before the close of the dividend period in
question, but will be ratified upon the occurrence of certain
conditions at the close of the dividend period. Both resolutions
contemplate that a list or table of accounts followed by corresponding
dividend rates will be attached to the resolution. This will prevent
credit unions from having to adopt a separate resolution for each
account type. These resolutions are not required, but are provided as
guidance of the proper corporate form to be used in declaring
dividends.
Nine commenters, including a national trade association commenter,
questioned the guidance provided by proposed comment 2(i)-3, which
stated that prospective rates may be altered ``if sufficient funds are
not available, or in the event of a superseding event, such as a
significant fluctuation in market rates, natural disaster or emergency
that alters the assumptions under which the `prospective rates' were
made.'' The commenters questioned the legality and prudence of the
proposed comment. Two commenters supported the comment. Basically, NCUA
proposed the comment in reference to natural disasters, such as the
recent California earthquake that destroyed several credit union
offices, resulting in extraordinary expenditures that reduced current
and undivided earnings, therefore lessening the amount of funds from
which dividends are properly payable. To provide general guidance to
credit unions affected by disasters and similar situations, in order to
reflect the unique nature of the dividend setting process, and to
provide commentary protection in the rare event that a credit union may
need to lower a dividend in response to a natural or man-made disaster,
NCUA has retained the comment, as revised. It is the intention of the
Board that credit unions make every effort to meet the disclosed
prospective rates on accounts when such rates are properly declarable,
available, and payable, and this guidance has also been added to
comment 2(i)-3. However, the NCUA Board disagrees with the position
taken by the commenters that NCUA could alter applicable legal
principles and agency interpretations on the proper payment of
dividends. The questioned statement reflects long-standing NCUA
interpretations of section 117 of the FCU Act for federal credit
unions, and is supported by well-grounded general corporate law in
regards to dividends, as expressed in legal encyclopedias, hornbooks
and other sources. Although NCUA believes that the statement would also
be applicable for many state-chartered credit unions, since applicable
state law controls the dividend process for state-chartered credit
unions, this clarification has also been added to the comment. For
further information on dividends, and when they are properly payable,
NCUA refers state-chartered credit unions and their members to relevant
state law.
(j) Dividend Declaration Date
Four commenters requested a clarification as to whether the
``dividend declaration date'' was the date of the actual board meeting
on which a credit union's board of directors declares the dividend, or
the actual effective date of the dividend declaration. The importance
of the dividend declaration date is to give members and potential
members an idea of the timing of the last paid, declared dividend. The
NCUA Board never intended for the dividend declaration date to be
determined by use of a technical, complex formula. In order to reflect
the intent of the use of dividend declaration date, the Board has
provided several examples of the types of statements indicating time
periods that would comply with the definition. The commenter also
requested a clarification on whether ``prospective rates'' must be
properly declared by a credit union's board of directors. Because the
declaration of a prospective rate is tantamount to the declaration of
an actual rate on an account (since only under rare circumstances would
the board not adopt or ratify a prospective rate), the declaration of a
prospective rate should be approached by a credit union's board of
directors with the same responsibility as a formal declaration of an
actual dividend rate. Further discussion of the dividend rate setting
process is contained in comments 2(i)-2 and 3 and an example of a
resolution to declare prospective dividend rates is provided in comment
2(i)-4(ii).
(m) Extraordinary Dividends
A national trade association commenter, as well as a few other
commenters, suggested that this comment be expanded to discuss whether
loan interest is considered an extraordinary dividend (no, as arises
from the loan relationship and not the share account relationship, FCUs
must follow 12 CFR 701.24 in order to make a refund of interest on a
loan); the relationship of extraordinary dividends to the APYE (none,
extraordinary dividends are excluded from the definition of
``dividends'' and ``interest,'' and therefore do not enter into the
APYE calculation); and the proper methods for calculating extraordinary
dividends (by any means determined by the board of directors of the
credit union). These changes have been incorporated into comment 2(m)-
1. After study, staff advised the Board that extraordinary dividends
are often paid on bases not related to the amount of dividends in the
account, such as evenly dividing the amount to be distributed by the
number of members, or through a formula tied to the number of credit
union loan and share account products used by the member. Since
extraordinary dividends are not a component of the dividend rate,
annual percentage yield, or annual percentage yield earned, and are a
unique practice of credit unions, the Board has determined that any
procedure devised by a board of directors may be used to figure
extraordinary dividends. Of course, it is acceptable if a board were to
use either the daily balance method or average daily balance method to
compute extraordinary dividends, even though those methods are not
required.
Twelve commenters, including a national trade association,
requested that credit unions be allowed to use the more common term
``bonus dividends'' to describe ``extraordinary dividends.''
Originally, the NCUA Board has declined to use the term ``bonus
dividends'' for fears that members would confuse it with ``bonuses,''
as defined by part 707. Final Rule, 58 FR 50394 at 50402 (September 27,
1993). However, after further reflection, given members' familiarity
with the distinctions between the two terms, and the long-standing
credit union tradition of calling such irregular dividends ``bonus
dividends,'' the Board has revised its position. NCUA has no objection
to the use of the term ``bonus dividends'' as a synonym for
``extraordinary dividends,'' as has revised comment 2(m)-2 accordingly.
(q) Member
An example relating to a landlord-tenant relationship in proposed
comment 2(q)-2 was deleted as unnecessary by the FRB. A few commenters
agreed with the deletion. NCUA has followed the FRB and deleted the
example.
The Board also reminds readers that unincorporated association
accounts have been deleted from TISA and part 707 coverage by new
legislation discussed previously in this supplementary information.
(s) Passbook Account
NCUA, like the FRB, has clarified comment 2(s)-1 that institutions
may consider accounts as passbook accounts even when direct deposits
are made to the account electronically. The comment tracks the
requirements of Regulation E (12 CFR 205.9). But accounts that permit
other electronic fund transfers--and thus trigger Regulation E's
requirement to send statements at least quarterly--are not passbook
savings accounts, and institutions must comply with the statement
disclosures in Sec. 707.6 of this part. Accounts that send statements
are not passbook accounts for purposes of Part 707, even if members are
provided passbooks for their records.
(t) Periodic Statement
One national trade association stated that NCUA should clarify that
periodic statements are not required on accounts. This is clarified on
comment 2(t)-1. In order to provide more uniformity with the Regulation
DD format, proposed comment 2(t)-3, Regulation E interplay, has been
moved to comment 6(a)-2; proposed comment 2(t)-4, account status
information, has been moved to comment 6(a)-3; and proposed comment
2(t)-5, use of ledger and collected balance to calculate annual
percentage yield, has been moved to comment 6(b)(1)-1.
(u) Potential Member
One commenter requested that NCUA clarify that credit unions must
provide disclosures to potential members upon request. This is already
required in Sec. 707.4(a)(2)(i) of the rule. The purpose of the
commentary is to expound upon, but not to repeat, the rule
requirements. However, because the Board believes that it may assist
credit unions in complying with the rule, the regulatory requirement
has been repeated in comment 2(u)-2.
Three commenters suggested that NCUA note that proposed comment
2(u)-2, suggesting that credit unions have sound written procedures in
place to identify those for membership, be modified to note its
discretionary, rather than mandatory, character. The NCUA Board agrees
and has so modified comment 2(u)-2. In the case of a credit union
having a permissible indirect lending arrangement with a third party,
such as an automobile dealer, credit union's may invoke member
verification procedures before providing account disclosures when the
potential member is not present at the credit union.
(x) Term Share Account
Proposed comment 2(x)-2 distinguishing between regular share club
accounts and term share club accounts has been revised extensively
based on comments received and consultation with FRB staff. Basically,
although club accounts typically have one feature of a term share
account (a maturity date), club accounts are not term share accounts
unless they also require a penalty of at least seven days' dividends
for a withdrawal of funds during the first six days after the account
is opened--subject to exceptions permitted in Regulation D. 12 CFR part
204. As requested by many commenters, the final comment 2(x)-2 explains
distinctions between term share club accounts and regular share club
accounts. One national trade association commenter requested that NCUA
provide the same club account commentary as did the FRB. The Board
agrees with, and has adopted, this approach. One national trade
association suggested that all club accounts should be treated as
regular share accounts by NCUA. Since this position was not taken by
the FRB in Regulation DD, and no uniqueness reasons have been proffered
to NCUA to differentiate credit union club accounts from club accounts
offered by other depository institutions subject to Regulation DD, this
position has not been adopted by the NCUA Board.
(y) Tiered-Rate Account
One national trade association commenter requested clarification
regarding whether tiered-rate accounts could have minimum balance
requirements, and whether a zero rate (0%) could constitute a tier.
NCUA has carefully reviewed comment 2(y)-1, and finds no reason to
change the guidance provided.
(z) Variable-Rate Account
Comment 2(z)-1 clarifies that a share certificate permitting one or
more rate adjustments prior to maturity at the member's option is a
variable-rate account. NCUA, like the FRB, believes it is important for
members to receive disclosures describing when their dividend rate and
APY could change, such as any time limitations on when the option may
be exercised.
In response to a commenter, the Board has clarified comment 2(z)-2.
In the proposed commentary NCUA summarized that rate decreases and
other term changes members' accounts required 30-day changes-in-terms
notices to take effect. The final comment clarifies that changes-in-
terms notices are required for changes in terms adversely affecting the
member. The effective date of other, beneficial term changes would
depend upon the account agreement and applicable state law.
Section 707.3--General Disclosure Requirements
(a) Form
Four commenters criticized proposed comment 3(a)-3, which stated
that ``if a credit union provides one document for several types of
accounts, members must be able to understand clearly which disclosures
apply to their account.'' The pertinent regulation states:
``Disclosures * * * may be combined with disclosures for the credit
union's other accounts, as long as it is clear which disclosures are
applicable to the member's accounts.'' 12 CFR 707.3(a). Since the Board
did not mean to place an additional burden upon credit unions, but
merely to paraphrase the rule, to eliminate any potential confusion the
Board has revised the comment to more closely pattern after the
regulation.
(b) General
Comment 3(b)-2 provides guidance on the specificity required when
time periods are disclosed. For example, the FRB believes slight
variations in compounding cycles are consistent with the notion of
``monthly'' cycles, which are often not based on an actual calendar
month. Many FRB commenters generally supported the FRB's approach, but
expressed concern about the proposal's limitation of 28-33 days to
describe a month. The FRB decided to adopt a standard of roughly
equivalent intervals occurring during a calendar year. The FRB believes
this standard is consistent with TISA, provides flexibility, and eases
compliance. For the reasons provided by the FRB, the NCUA Board also
adopts this approach.
(d) Multiple Members
Proposed comment 3(d)-1 permitted credit unions to give a
disclosure to a nonmember joint accountholder. Four commenters,
including national trade association commenter, noted that the proposed
interpretation was incorrect. Under Sec. 707.2(q)(2), nonmember joint
accountholders are deemed to be members for purposes of part 707.
Therefore, the distinction made was an invalid one, and has been
deleted from the commentary.
(e) Oral Responses to Inquiries
Comment 3(e)-1 reflects that disclosures need only be made as
appropriate. Therefore, if a member telephones a credit union for
information, the credit union need not disclose a telephone number to
call, as the member would obviously already have that information. This
clarification, requested by seven commenters, is added to comment 3(e)-
1. Another commenter requested that the Board clarify that this
requirement applies only to employees and volunteers acting in the
course of credit union business. This change has also been adopted by
the Board in comment 3(e)-1, to reflect the unique nature and position
of volunteers in credit unions.
Seven commenters requested that the oral response to inquires
disclosures be simplified, such as by eliminating any reference to past
or prospective rates. To do so would require a change in Sec. 707.3(e)
of the regulation and is beyond the scope of this rulemaking. Also,
NCUA must stress that the need to disclose that rates are either past
or prospective is important to provide accurate, nonmisleading
information to credit union members to reflect the facts concerning
share accounts. A national trade association commenter noted that
proposed comment 3(e)-3 did not closely parallel the language of
Sec. 707.3(e). The Board agrees with the commenter, and, on further
reflection and to eliminate confusion, has deleted references in
comment 3(e)-3 repetitive of Sec. 707.3(e).
Comment 3(e)-3 has been added to conform to a change made in
Regulation DD, as requested by five commenters, including a national
trade association commenter. It clarifies that this paragraph does not
apply to responses to requests for rate information on an existing term
share account or on an account not currently offered to members and
potential members, such as obsolete accounts.
(f) Rounding and Accuracy Rules for Rates and Yields
(f)(1) Rounding
In response to a national trade association commenter, comment
3(f)(1)-1 has been amended to reflect that account disclosures, unlike
advertising and other disclosures, may show the dividend rate to more
than two decimal places.
Section 707.4--Account Disclosures
(a) Delivery of Account Disclosures
(a)(1) Account Opening
Comment 4(a)(1)-1 provides examples of events that trigger the
delivery of new account disclosures. The final comment differs from the
proposal in several respects. Proposed comment 4(a)(1)-1 discussed the
effect of a member-initiated change in the term for an automatically
renewable term share account. In response to FRB commenters' requests
on the Regulation DD proposed comment counterpart to 4(a)(1)-1, the FRB
commentary clarifies that new account disclosures are required when the
member changes any account term required to be disclosed (and not
merely the duration of a time account). The clarification provides
consistency with comment 5(b)-5, and has been adopted as comment
4(a)(1)-1(ii).
FRB commenters expressed concern about having to give new account
disclosures when funds are transferred from one account to another,
such as when funds in a money market deposit account (MMDA) are
transferred to a NOW account because the consumer exceeded transaction
limitations on the MMDA. Some requested clarification that disclosures
at the time of transfer are not required if disclosures (including
change-in-terms notices, if appropriate) for both accounts had
previously been given. To minimize possible burdens the FRB adopted
that standard in the FRB commentary. For similar reasons, the NCUA
Board adopts this position in comment 4(a)(1)-1(iii).
The FRB also received many comments regarding the proposed guidance
for ``closed accounts.'' New account disclosures would have been
required if institutions deemed an account closed and then accepted a
deposit from the consumer. FRB commenters noted that consumers with
accounts meeting an institution's criteria for a closed account--such
as an account having a $0 balance--do not necessarily intend to close
the account. FRB commenters believed consumers would be confused if new
account disclosures were sent when a deposit is subsequently made. FRB
commenters also expressed concerns about the burden of monitoring
accounts to ensure compliance.
TISA allows institutions not to pay accrued but uncredited interest
when a consumer closes an account. (See 12 U.S.C. 4303(c)(9).) Based on
comments received by the FRB and upon further analysis, the FRB
believes that if an institution deems an account closed and treats
accrued, but uncredited, interest as forfeited by the consumer, the
institution must deem a new account to be opened when a deposit is
subsequently accepted. This approach provides flexibility for
institutions and consistent treatment for consumers regarding
``closed'' accounts. Five NCUA commenters agreed with the Regulation DD
approach. Five NCUA commenters, including a national trade association,
disagreed with the FRB's approach, on grounds that account terms may
not have changed between an account's closing and its reopening; that
some credit union's data processing systems automatically opened the
account with the former account's number; and to modify systems would
be a costly, unnecessary expense. While sympathetic to credit union's
facing this predicament, because these reasons do not reflect any
credit union uniqueness points. NCUA is bound to follow the FRB's
rationale, and the NCUA Board adopts the FRB's approach. However, it is
the belief of the Board that a credit union is not required to grant a
new account number to the holder of a reopened ``closed account''; all
that is required by this rule is the distribution of a new set of
account disclosures. No data processing changes are contemplated by
this commentary, and this is reflected in a revision to comment
4(a)(1)-1. The Board hopes that this revision will reduce the
compliance burden on credit unions.
The Board does note that account closure for credit unions does not
necessarily occur in the same manner as for other depository
institutions. A member may voluntarily close an account by actively
terminating membership in a credit union. For instance, under the
Standard FCU Bylaws, Art. II, Sec. 4, a member who withdraws all of his
shareholdings ceases to be a member. The membership of a member may
also be terminated by action of the credit union. For instance, a
member may be expelled by majority vote of the membership under
Standard FCU Bylaws, Art. XVI (and 12 U.S.C. 1764(a)); or an FCU may
terminate a member's membership if the board of directors has adopted a
nonparticipation policy, which has been publicized to the membership
(12 U.S.C. 1764(b)); or if a member falls outside of the credit union's
field of membership (e.g., the member moves out of the geographical
coverage of a community-based credit union), unless the credit union
has adopted a ``once a member, always a member'' policy under Standard
FCU Bylaws, Art. II, Sec. 5. If a member merely lets the membership
share account drop below the stated par value, neither the membership
nor the account of the member are terminated. Standard FCU Bylaws, Art.
III, Sec. 3; NCUA Letter to Credit Unions No. 70 (November 29, 1982).
Under the Standard FCU Bylaws, once an account is closed, and the
membership terminated, both the membership and the account must be
reestablished. Therefore, the ``closed account'' guidance adopted by
the NCUA Board conforming to that of the FRB applies only to accounts
closed by the member or the credit union in conformance with applicable
federal or state law. This clarification is made in comment 4(a)(1)-1.
This clarification agrees with guidance provided in the preamble to the
final part 707. 58 FR 50394 at 50414 (September 27, 1994).
Comment 4(a)(1)-2 clarifies that an institution acquiring accounts
through a merger or acquisition is not required to provide new account
disclosures. However, such accounts are required to calculate dividends
by either the daily or average daily balance method; comply with
Sec. 707.5(a)(1) if it chooses to change terms of the acquired account;
and follow the periodic statement requirements, if applicable. As the
accounts are no longer offered, no advertising rules should ever be
triggered. NCUA does note that certain term share accounts no longer
currently offered may require new account disclosures if they are
nonrollover or if new account disclosures would be required under
Sec. 707.5. Private merger and purchase of asset and shares
transactions are distinguishable, however, from acquisitions or mergers
involving the National Credit Union Share Insurance Fund (NCUSIF). In a
government-assisted acquisition, the acquiring institution receives
only the member's funds on account. The account contract or other legal
obligation--the terms and conditions of the account such as fees--stays
(and ultimately terminates) with the failed credit union. Thus, new
account disclosures must be provided if the member chooses to open an
account with the new institution. Also, if fees are imposed before the
new account relationship is established, the fee must be disclosed
prior to imposition.
Two national trade association commenters, as well as fourteen
other commenters, requested that a clarification be issued regarding
guidance in proposed comment 4(a)(1)-1. Two commenters requested that
the provision be deleted as unnecessary and confusing. NCUA had
proposed that if a member were to open separate subaccounts from a main
account and if the terms were identical to that of the main account,
that new disclosures would not have to be provided to the member. The
commenters noted that the terms of an account will rarely be
``identical'' to those of a subaccount. The Board agrees with the
commenters, therefore the proposed comment (now comment 4(a)(1)-3) has
been amended to reflect that new disclosures need not be provided if
the credit union has already provided combined disclosures for the main
and subaccount within a reasonable time of when the subaccount is
opened and the applicable disclosures are still accurate when the
subaccount is opened.
(a)(2) Requests
(a)(2)(i)
As requested by a national trade association commenter, comment
4(a)(2)(i)-1 clarifies that institutions are not required to send new
account disclosures for accounts no longer offered to the public.
A national trade association requested that NCUA offer credit
unions the choice of offering members and potential members either
account disclosures or rate sheets in responses to requests for
disclosures under Sec. 707.4(a)(2). Since the rule only permits account
disclosures to be provided upon request, and the proposed rulemaking
concerned only Appendix C, the commentary to part 707, the commenter's
request is beyond the scope of this rulemaking. The Board would violate
the requirements of the Administrative Procedure Act to consider such
an amendment in this final rule. Also, as no credit union uniqueness
arguments were presented, the NCUA Board does not believe that even if
such request were within the scope of this rulemaking, that it would
adopt such an amendment.
(a)(2)(ii)(A)
Comment 4(a)(2)(ii)(A)(2)-1 clarifies that when responding to a
request for disclosures by giving rates ``accurate within the most
recent seven calendar days,'' institutions should calculate the time
period from the date the institution sends the disclosure. This
clarification is based upon a similar change made in the final
Regulation DD commentary.
(b) Content of Account Disclosures
(b)(1) Rate Information
(b)(1)(ii) Variable Rates
Comments 4(b)(1)(ii)(B)-1 and 4(b)(1)(ii)(C)-1, dealing with rate
changes within the institution's discretion, have been modified. FRB
commenters believed rates derived from formulas based on an
institution's cost of funds, for example, are not ``solely'' in the
institution's discretion. In response to FRB commenters' requests, both
comments were revised in Regulation DD for clarity and consistency. A
national trade association commenter has also made the request that
NCUA conform to the Regulation DD commentary. For the reasons stated by
the FRB, and for uniformity, the NCUA Board has done so.
(b)(2) Compounding and Crediting
(b)(2)(i) Frequency
Three commenters believed that proposed comment 4(b)(2)(i)-2 was
confusing in that readers might be misled to not disclose dividend
periods for dividend-bearing accounts. To allay such fears, the comment
has been revised to clarify that a dividend period should be disclosed
on all dividend-bearing accounts.
(b)(2)(ii) Effect of Closing an Account
As requested by one commenter, comment 4(b)(2)(ii)-1 is modified
from the proposal to reflect that state or other law may affect an
institution's ability to include in its contract specific member
actions considered by the institution to be a request to close the
account.
Five commenters failed to understand the necessity of mentioning
the FCU bylaw restrictions on closing member's accounts in proposed
comment 4(b)(2)(ii)-1. Unlike banks and thrifts which can contractually
close accounts for non activity, an FCU cannot close a member's account
when it drops below the par value of one share. Instead, the FCU must
give the member at least six months to bring the account back up to par
value. To highlight this very important membership distinction, the
bylaw requirement is mentioned in the comment. The NCUA believes that
it is a critical distinction of the member of FCUs, and some state-
chartered credit unions, and declines to remove the comment from the
final commentary.
(b)(3) Balance Information
(b)(3)(i) Minimum Balance Requirements
Three commenters requested that the Board not require the par value
of a share to be disclosed, arguing that it is a membership, not a
minimum balance, requirement. The NCUA Board disagrees with this
approach. A member is generally not entitled to membership rights,
including transacting on accounts, until the par value of a membership
share is fully paid-in. Therefore, the payment of a full par value
share is a minimum balance requirement, as is stated in comment
4(b)(3)(i)-1.
(b)(3)(iii) When Dividends Begin to Accrue
One national trade association commenter requested that the NCUA
delete proposed comment 4(b)(3)(iii)-1, as in the commenter's opinion,
such disclosures are not necessary for credit unions that begin
accruing dividends for all deposits on the day of deposit. Even if all
credit unions did begin to accrue dividends for all deposits on the day
of deposit, which even the commenter admits is not the case, the Board
believes that its commentary should remain substantially similar to
that of the FRB. Therefore, the Board has left the proposed comment
unchanged in the final commentary.
(b)(4) Fees
The FRB provided additional guidance in comment 4(b)(4)-1 for fees
imposed for sending to consumers checks that otherwise would be held by
the institution. Comment 4(b)(4)-2 clarifies that photocopying fees are
incidental fees not required to be disclosed. NCUA has adopted both of
these changes to conform to Regulation DD. In response to a national
trade association commenter, other clarifications have also been made
by the NCUA Board: (1) That ``fees related to the routine use of an
account must be disclosed;'' and (2) that fees for statements returned
to the credit union because of a wrong address need not be disclosed.
However, the Board disagrees with the commenter, and believes that it
is necessary, in order to conform with the final Regulation DD
commentary, that dormant account fees and inactivity fees be disclosed.
This clarification is also made in the final commentary.
Other commenters requested that the Board classify fee types not
discussed in the proposed commentary: dormant account fees, locator
fees, overdraft line of credit access fees, wire transfers, and
automated clearing house (ACH) transfers. These fees have been
classified in comment 4(b)(4)-1. In response to another commenter, the
Board has added a reference that merely providing fee information to
members in an account disclosure may not be enough to gain the legal
right to impose the fees involved under applicable state law.
(b)(5) Transaction Limitations
Eleven commenters, including two national trade associations,
requested that NCUA not require disclosures based upon a credit union's
bylaws that could be imposed and act as transaction limitations upon an
account. The commenters stated that it would place credit unions at an
unfair competitive advantage with banks. One national trade association
argued that since the bylaw requirements were rarely invoked, that they
should not be disclosed unless they were to be invoked, in which case
members would be notified through a change-in-terms notice. After
consultation with FRB staff, NCUA learned that the FRB does not require
disclosure of notice of withdrawal, and other unusual, rarely invoked,
requirements under state and local law under Regulation DD. For reasons
of parity, uniformity, and conformity, NCUA also adopts this approach,
reflected in comment 4(b)(5)-1(iii).
However, the Board does encourage credit unions to publicize bylaw
limitations, and other policies, that could potentially affect a
member's ability to use his account. Credit unions are different from
other financial institutions in that the bylaws form a contract between
the members and the credit union. Any restrictions upon a member's
account arising from the bylaws is as real as a restriction arising
from the account contract. In fact, many members are unfamiliar with
their bylaws. There are presently no federal requirements for a credit
union to publicize its bylaws among its members, even though it has
long been NCUA policy to encourage credit unions to educate their
members regarding the content of their credit union's bylaws. The
Standard FCU Bylaws only require that FCUs make their bylaws
``available for inspection by any member.'' Standard FCU Bylaws, Art.
XIX, Sec. 6. In state-chartered credit unions a member's right to view
the bylaws is dependent upon state law, which laws sometimes require a
proper business purpose. If credit unions believe the transaction
limitations in the Standard FCU Bylaws to be too restrictive, it is
suggested that they consider petitioning the appropriate NCUA Region
for a nonstandard bylaw amendment. However, FCUs are cautioned that
NCUA will not entertain petitions to change either Art. III, Sec. 3
(allowing members at least 6 months to increase a membership share to
par in order to retain membership) or Art. III, Sec. 5 (reserving the
right to require 60 days' notice on withdrawals, historically to be
sued in the event of an emergency). Seven commenters agree with this
approach.
One national trade association commented that credit unions should
not have to disclose suspension of services policies, because such
policies are not a common practice. For the reasons stated in the
preceding paragraph, NCUA agrees with this approach. While not
encouraging their use, NCUA has opined that an FCU may suspend services
to members who have caused a loss to the FCU if a proper suspension of
services policy is adopted by the FCU's board of directors. A proper
suspension of services policy should state: (1) When the services will
be suspended; (2) which services are suspended (e.g., ATM services,
credit cards, loans, share draft privileges, preauthorized transfers,
etc.); (3) note that the member has a fundamental right to maintain a
share account and vote in annual and special meetings; and (4) provide
for methods of reinstatement of services by the member. In addition,
the suspension of services policy should be publicized to members, and
not operated discriminatorily, in violation of the Equal Credit
Opportunity Act, Regulation B (12 CFR part 202), the Bankruptcy Code,
or any other applicable law. Due to the consequences deriving from a
suspension of services policy, NCUA believes that those credit unions
having such policies should publicize them in detail to their
membership.
(b)(6) Features of Term Share Accounts
(b)(6)(ii) Early Withdrawal Penalties
For uniformity and parity reasons, the NCUA Board has adopted
comment 4(b)(6)(ii)-4. The comment was added to Regulation DD in
response to FRB commenters requesting guidance for disclosing early
withdrawal penalties.
(b)(6)(iv) Renewal Policies
At the request of a national trade association commenter, the last
sentence of proposed comment 4(b)(6)(iv)-2 regarding club accounts has
been removed as being unnecessary, especially in light of the revised
comment on club accounts. Comment 2(x)-2.
(b)(8) Nature of Dividends
A national trade association commenter requested a revision of
proposed comment 4(b)(8)-2, to reflect that if a member already had a
share account at a state-chartered credit union offering deposit
accounts in accordance with state law, share account disclosures would
not be required. The commenter's position is unfounded. Since the share
account is a currently offered account, there are no grounds under
either TISA or Part 707 to exempt it from the disclosure requirements.
Therefore, the final comment is unchanged. Similarly, two other
commenters from Georgia requested that the comment reflect certain
unique provisions of Georgia law. NCUA believes that state law
determines whether an account is a deposit account or a share account
for accounts in state-chartered credit unions. However, to revise the
comment to reflect one state's laws, to the exclusion of other states,
would not be useful. Therefore, the NCUA Board has modified comment
4(b)(8)-2 to reflect that state law controls the nature of accounts for
accounts in state-chartered credit unions. The Board believes that this
action will enable state credit union supervisors to provide proper
guidance to state-chartered credit unions by interpreting various state
laws without federal interference.
(c) Notice to Existing Accountholders
A national trade association commenter requested that NCUA delete a
statement in proposed comment 4(c)-4, which stated that credit unions
complying with part 707 in advance of the compliance date would need to
comply with all aspects of part 707. NCUA staff has verified the
position in the proposed comment with FRB staff, and since NCUA must
maintain substantial similarity with the FRB, and no uniqueness grounds
were presented in order that an exemption could be justified, NCUA has
not changed the proposed comment.
Four commenters requested that NCUA clarify that credit unions that
have complied with TISA and part 707 requirements before the compliance
date, need not send second disclosures. The NCUA Board has clarified
this in comment 4(c)-4. The Board also wishes to clarify, in response
to a question raised by a commenter, that NCUA does not require any
credit union to issue new accounts, including new certificates, on the
mandatory compliance date of part 707. All that part 707 requires is
that credit unions send a notice to certain members of the availability
of disclosures, or the disclosures themselves, by, on or soon after the
compliance date, to have disclosures reflecting the terms of accounts
offered available, to make certain periodic statement and advertising
disclosures, and to pay dividends on the full balance in the account
using the daily balance or average daily balance method. Basically, no
new accounts need be issued; only accurate disclosures conforming to
part 707 reflecting accounts need be available.
Section 707.5--Subsequent Disclosures
(a) Change in Terms
(a)(1) Advance Notice Required
In response to the comments of eleven commenters, including a
national trade association commenter, comment 5(a)(1)-1 has been
amended to clarify that unless credit unions have reserved the right to
change terms in the account agreement or disclosures, they cannot
change terms by simply providing a change-in-terms notice, and to
clarify that change-in-terms notices can be included as a highlighted
portion of a credit union's newsletter provided to all affected
members. Another commenter requested that guidance in the final NCUA
Truth in Savings rule allowing notice by means of mail, newsletters,
and statement stuffers, be provided in the commentary. Final Rule, 58
FR 50394 at 50422. The Board has added this information to the final
commentary.
Comment 5(a)(1)-3 provides guidance on an institution's
responsibility to provide change-in-term notices when account
disclosures reflect a term that will change upon the occurrence of an
event. The comment has been revised to conform with the final
Regulation DD commentary.
One commenter requested guidance on which terms needed change-in-
terms notices in order to be changed. Section 707.5(a) refers to those
terms required to be disclosed under Sec. 707.4(b), if the change may
decrease the APY or adversely affect the member. The NCUA Board
believes the spirit and intent of TISA is that most changes in the
required account disclosures should be disclosed to members to enhance
the ability of members to comparison shop for accounts.
(a)(2)(ii) Share Draft and Check Printing Fees
In response to FRB comments received, comment 5(a)(2)(ii)-1 has
been expanded to exclude increases in fees for printing deposit and
withdrawal slips from change-in-term notice requirements, although
NCUA, like the FRB, believes that separate charges for deposit and
withdrawal slips, which are typically provided along with checks, are
seldom imposed. Many FRB commenters stated that, like check printing
fees, fees for printing deposit and withdrawal slips are not within the
institution's control, since the consumer determines the quantity
ordered.
(c) Notice for Term Share Accounts One Month or Less That Renew
Automatically
NCUA believes that 20 days is a reasonable amount of time to
provide these disclosures, particularly in light of small credit
unions, some only open one day each week, which would be subject to
this requirement.
Section 707.6--Statement Disclosures
(a) Rule When Statement and Crediting Periods Vary
Four commenters, including a national trade association, stated
that proposed comment 6(a)-3 implied that periodic statements were
required for credit union accounts. The NCUA has revised comment 6(a)-1
to reflect that periodic statements are not required on credit union
accounts. However, any statement setting forth information about an
account (other than a term share or passbook account) that is provided
to a member on a regular basis four or more times a year, is a periodic
statement subject to Sec. 707.6. NCUA cautions credit unions that if
transaction information is provided on a periodic statement on a
passbook account, that the credit union runs the risk of having the
account deemed a statement savings account subject to full periodic
statement requirements. This position has been taken after consultation
with FRB staff.
Comment 6(a)-1 clarifies that if zero interest is earned during the
period, institutions may disclose $0 for interest earned (and the
annual percentage yield earned) or omit the disclosure, at their
option. This change was made to conform to Regulation DD, and in
response to one commenter's request.
Seventeen commenters, including a national trade association
commenter, requested that the issue of account status information in
proposed comment 2(t)-4 be addressed. Commenters questioned whether
accounts not expressly covered by the periodic statement requirement,
such as term share and passbook accounts: (1) Were limited to account
status information; or (2) were subject to full application of the
advertising regulation (12 CFR 707.8); or (3) whether they could
disclose any information on such accounts, including rate and APY
information, as long as such information was accurate and not
misleading. After consultation with the FRB, the proposed comment was
moved to comment 6(a)-3 and clarified to indicate that a credit union
may provide any information regarding passbook (unless the provision of
transaction information on the account turns the passbook account into
a statement share account covered by Sec. 707.6) and term share
accounts on a periodic statement, as long as the information is
accurate and not misleading. For definitional reasons, the periodic
statement requirements do not apply. Also, since the information is
provided on an existing account, and not as an inducement to open,
maintain or renew an account, the advertising disclosures do not apply.
One commenter also asked whether account status information on
covered accounts could include joint accountholders' names, year-to-
date earned dividends, transaction dates, and social security or tax
identification numbers. These issues are addressed in comments 6(a)-3
and 4.
(b) Statement Disclosures
(b)(1) Annual Percentage Yield Earned
A national trade association commenter requested a clarification
that the ledger balance and collected balance are not methods to
calculate the APYE, but rather methods to determine the balance upon
which to pay dividends. This clarification has been made in comment
6(b)(1)-1. To provide more flexibility, and to conform to provisions in
Regulation DD, the Board has deleted statements in comment 6(b)(1)-1
indicating that credit unions must use the same balance (collected or
ledger) to accrue and pay dividends and to determine the annual
percentage yield earned.
(b)(2) Amount of Dividends
To provide uniformity and parity with provisions of Regulation DD,
the Board has adopted comment 6(b)(2)-2, but has limited its
application to interest-bearing deposit accounts. It would be difficult
and burdensome, if not impossible, for a credit union to state the
amount of accrued dividends on a statement, since as discussed in
comment 2(i)-3, such dividends are not generally properly declarable
until the close of the dividend period.
Comment 6(b)(2)-3 clarifies that institutions may use a variety of
terms to disclose dividends earned, and that the regulation does not
mandate use of the examples. In response to a national trade
association commenter, NCUA has conformed comment 6(b)(2)-4 to the
final Regulation DD commentary, and credit unions are permitted, but
not required, to show the APYE and dividends as zero, on a closed
account on the periodic statement. In response to two commenters, NCUA
has revised comment 6(b)(2)-5 to reflect that information, other than
the dollar amount, regarding extraordinary dividends may be disclosed
on the periodic statement as long as it is not inaccurate or
misleading. The Board believes that information regarding the
calculation of the extraordinary dividend, and additional APYE and
dividend rate figures taking into account the extraordinary dividend,
would not be inaccurate or misleading and might offer the member
additional useful information on the accounts held by the member.
(b)(3) Fees Imposed
This comment has been changed to reflect the final amendment to
Sec. 707.6(b)(3) of part 707 made in this rulemaking to correct a
redundant typographical error. In response to three commenters,
including a national trade association commenter, various
clarifications are made to enhance understanding without substantively
changing the meaning of proposed comment 6(b)(3)-2.
(b)(4) Length of Period
One national trade association requested that NCUA clarify proposed
comment 6(b)(4)-2, opening or closing an account midcycle. The
commenter stated that when a member opens an account in the middle of a
statement period the credit union should be required to use the actual
number of days the account has been opened, as opposed to the number of
days in the statement period. Comment 6(b)(4)-2 has not been changed,
as it is in conformance with Regulation DD. However, the NCUA Board
believes that the commenter's concern should be addressed, and has
plans to address it in the NCUA Accounting Manual for FCUs.
Section 707.7--Payment of Dividends
(a) Permissible Methods
(a)(1) Balance on Which Dividends Are Calculated
Comment 7(a)(1)-1 has been expanded to reflect TISA's legislative
history, which cites the ``low balance'' method as an example of a
prohibited dividend calculation method.
Proposed comment 7(a)(1)-6 addressed ``dormant'' accounts. The FRB
solicited and received numerous comment on whether an institution
should be permitted to withhold the payment of dividends for dormant
accounts. Some FRB commenters believed institutions should be permitted
to withhold the payment of interest for dormant accounts, if authorized
by state or other law and the deposit contract. Other FRB commenters
noted that what constitutes a ``dormant'' account varies widely among
the states and institutions. These FRB commenters expressed concern
about the impact of the rule if any period of inactivity--however
brief--could transform an account to dormant status. Still others
raised concerns whether TISA, which requires that interest be paid on
the full amount of principal in the account each day, permitted such an
interpretation. (12 U.S.C. 4306(a).) Based on the comments received and
further analysis, the FRB believes that account inactivity does not
affect an institution's duty to pay interest. (See comment 7(c)-3,
which provides that institutions must accrue interest on funds until
the funds are withdrawn from the account.) The FRB believes this
position--reflected in comment 7(a)(1)-6--is consistent with the
purposes of TISA and the rule that interest must be calculated for
funds in accounts meeting minimum balance requirements for as along as
funds remain in the account. For the reasons stated by the FRB, the
NCUA Board has revised its comment accordingly. Although two
commenters, including a national trade association commenter, requested
that the Board revise this comment to also include sample contract
language, the Board notes that the FRB did not provide such language,
and since the language must be in accord with state law, any attempt to
provide uniform national language might result in a disclosure that
would not accomplish its objectives in some states. Therefore, the
Board declines to provide such sample contract language. Another
commenter insisted that NCUA meant ``inactive account,'' which could be
defined by the credit union by contract, rather than ``dormant
account,'' which is defined by the state. However, NCUA has copied this
section from the FRB's Regulation DD, which concerns ``dormant
accounts.'' Therefore, NCUA declines to make the nomenclature change to
``inactive accounts,'' which might create a substantive variance from
the FRB.
Several commenters criticized proposed comment 7(a)(1)-7,
insufficient funds, which states that credit unions are not required to
pay dividends on deposits returned for insufficient funds. After
consultation with FRB staff, the NCUA Board, for reasons of parity,
uniformity and conformity, declines to change the substance of the
comment. However, the comment has been reworded, as suggested by a
commenter, to clarify its meaning.
Three commenters requested clarification on the time of day to
determine the day's balance. As long as the time of day used does not
reflect the low balance for the day (such as after debits are taken and
before credits are added), any uniform time of day may be used. The
time of day so chosen is not a required disclosure. The guidance was
provided in the proposed commentary and is in this final commentary as
comment App. A, Part II, Sec. 1-1.
(a)(2) Determination of Minimum Balance to Earn Dividends
Two commenters, including a national trade association commenter,
noted that proposed comment 7(a)(2)-4, regarding beneficial method, did
not conform to the position taken by the FRB in the final Regulation DD
commentary. Since no uniqueness reasons exist, NCUA has revised the
proposed commentary to conform to Regulation DD in this final
commentary. The national trade association commenter also requested a
definition of ``periodic rate'' in lieu of proposed comment 7(a)(2)-2.
However, for reasons of uniformity, conformity, and parity, the NCUA
Board declines to so modify this commentary. However, more
clarification regarding periodic rates will be provided in a revision
to the NCUA Accounting Manual for FCUs.
Comment 7(a)(2)-7 clarifies limitations on minimum balance
requirements to earn interest for club accounts--such as ``holiday'' or
``vacation'' club. The rule does not apply to a club account's minimum
balance requirements for earning bonuses. This position, taken by the
FRB in the final Regulation DD commentary, is also adopted by the NCUA
Board.
(b) Compounding and Crediting Policies
Comment 7(b)-3 has been revised to clarify that the circumstances
under which an institution may deem an account closed, and that
accrued, but uncredited interest may be deemed forfeited, are subject
to state or other law, if any (such as limitations in the Standard FCU
Bylaws).
Proposed comment 7(b)-4, dealing with the forfeiture of accrued,
but uncredited interest for dormant accounts, has been withdrawn for
the reasons discussed in 7(a)(1)-6. This change is also in conformance
with the final Regulation DD commentary.
Section 707.8--Advertising
(a) Misleading or Inaccurate Advertisements
Proposed comment 8(a)-2 would have required institutions using
indoor signs advertising APY's for tiered-rate accounts to state both
the lower and higher dollar amount for the tier corresponding to the
advertised APY. Many FRB commenters convinced the FRB that stating both
dollar amounts is unnecessary. Therefore, for reasons of uniformity and
parity, NCUA has adopted the Regulation DD change and the comment
provides that a sign is not misleading or inaccurate if it states the
lower dollar amount of the tier corresponding to the advertised annual
percentage yield.
Institutions cannot advertise accounts as ``free'' or ``no cost''
(or terms of similar meaning) if maintenance and activity fees can be
imposed. Comment 8(a)-3 address the scope of ``maintenance and
activity'' fees and addresses advertisements for ``free'' accounts with
optional electronic services. FRB commenters were divided on whether
fees for electronic services such as ATM access should preclude
institutions from advertising accounts as free. Based on the comments
received and further analysis, the FRB believes that ATM services are
not different from other optional services such as home banking.
Fourteen NCUA commenters, including two national trade associations,
agreed with the FRB's reasoning and position. For the reasons stated by
the FRB, NCUA follows the FRB and has revised comment 8(a)-4(vi)
accordingly. One commenter requested a cross-reference to comment
4(b)(4)-1 and 2 regarding fee disclosures, which cross-reference has
been added.
The FRB received numerous comments on its proposal to consider the
term ``fees waived'' as similar to the terms ``free'' or ``no cost.''
Many FRB commenters opposed the proposed comment. They stated that the
term ``fees waived'' necessarily implies the existence of charges, and
thus is distinguishable from the terms ``free'' or ``no cost.'' These
FRB commenters believed consumers would be unnecessarily disadvantaged
if advertising fee waivers were restricted as proposed. Others believed
most consumers would not distinguish between the terms and that
advertising accounts with ``waived fees'' raised the concerns of
Congress had in mind when prohibiting the advertisement of accounts as
free or no-cost or ``words of similar meaning.'' The FRB believes that
``fees waived'' is a term similar to ``free'' or ``no cost;'' thus,
comment 8(a)-5 has been retained as proposed. For reasons of uniformity
and parity, NCUA has followed the FRB's position.
(b) Permissible Rates
Comment 8(b)-3 provides guidance on advertising account for which
institutions offer a number of versions (certificate accounts, for
example). The FRB revised its comment for clarity without any intended
change in meaning, and the NCUA Board has conformed the comment to do
likewise.
(c) When Additional Disclosures are Required
The regulation requires institutions to disclose additional
information when the APY is advertised. Comment 8(c)-1 provides
examples of account descriptions that do not trigger the additional
disclosures. The FRB has eliminated the reference to a bonus of 1% over
an institution's current rate for one-year certificates as an example
of a trigger term. Based on comments it received and upon further
analysis, the FRB believes a reference to an institution's own rates
(to which a ``bonus'' rate or margin will be applied) is not a trigger
term if those rates are not readily determinable from the advertisement
itself. This position is consistent with the rules regarding trigger
terms in advertisements under the FRB's Regulation Z (12 CFR part 226).
For these reasons, NCUA has conformed comment 8(c)-1 in this regard.
This clarification was also made in response to four commenters'
requests.
(c)(2) Time Annual Percentage Yield is offered
Comment 8(c)(2)-2 has been added in to conform to the final
Regulation DD commentary. It specifies that an advertisement may refer
to the APY as being accurate as of the date of publication, if the date
is on the publication itself.
(e) Exemption for Certain Advertisements
(e)(1) Certain Media
One commenter requested clarification regarding whether messages on
ATM and computer screens would be entitled to this advertising
exemption. The regulation states that this exemption is available for
broadcast and electronic media, such as radio and television, outdoor
media, such as billboards, and telephone response machines. The Board
believes that ATM and computer screens are similar to these types of
media in many respects. First, ATMs are part of an electronic network,
such as radio and television. Second, most ATMs are at locations
outside of a credit union branch. Third, only a limited amount of space
is available to make a message available to a member. With this
reasoning, the Board has determined that ATM screens are subject to the
electronic media exemption, and has clarified this in comment
8(e)(1)(i)-1.
(e)(3) Newsletters
A national trade association commenter noted that neither the
letter, spirit, nor intent of TISA and part 707 would be violated if
credit unions were permitted to make newsletters available to potential
members. Since potential members must receive all required account
disclosures upon becoming a member and opening an account, potential
members could not be harmed by receipt of a member newsletter
containing accurate information, but not conforming in every regard to
the advertising requirements of part 707. It was also pointed out by
the commenter that newsletters have traditionally been used by credit
unions as a tool to increase membership, and that it would be
difficult, if not impossible, for credit unions to prevent members from
sharing newsletters with potential members sharing a common bond. The
NCUA Board, which created the newsletter exemption based upon credit
union uniqueness, is sympathetic to these additional reasons to expand
availability of the newsletters to potential members. however, to do so
at this time would require a rule amendment to Sec. 707.8(e)(3)(i),
which would be beyond the scope of the initial, proposed rulemaking,
and therefore, impermissible under the Administrative Procedures Act.
This being the case, the Board has not made any changes to comments
8(e)(3)-1 and 2. The Board will continue to monitor this situation, and
if additional Truth in Savings rulemakings are necessary in the future,
will consider requesting comments on a proposed amendment to expand the
newsletter exemption to cover potential member distribution. Similarly,
another commenter asked that the Board include information provided on
an ATM screen under the newsletter exemption. As the FRB has clearly
included ATM screen messages as covered advertisements in the
definition of ``advertisement,'' and NCUA must be substantially similar
to the FRB, NCUA declines to make this change, which also is outside of
the scope of this rulemaking. However, the Board has stated that ATM
and computer screen messages may use the electronic media exemption.
Comment (e)(1)(i)-1.
Appendix A--Annual Percentage Yield Calculation
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
In response to commenters, NCUA has revised comments app.A.I.-2 and
3. Comment app.A.I.-2 adds that, for leap year annual percentage yield
calculations, the ``days in term'' figure used in the denominator
should be consistent with the length of term used in the dividends
calculation. Comment app.A.I.-3 clarifies that the guidance on the
first tier of a tiered-rate account only applies when such information
is provided in a rate table format, and not in the written format of
sample clauses provided at Appendix B, Sec. B-1(a)(iv).
In response to another commenter, NCUA added comment app.A.I.-4,
which provides that term share club accounts may calculate the annual
percentage yield based on the maximum number of days in the term, not
to exceed the number of days in the year.
Part II. Annual Percentage Yield Earned for Statements
Comment app.A.II.-1 has been clarified without any change in
meaning. Proposed comment app.A.II.-2, requiring the provision of
certain collected balance information on the periodic statement, has
been deleted since it is not in conformity with the FRB's position in
Regulation DD and no uniqueness reasons exist for its existence. As a
result, proposed comment app.A.II.-3 has been renumbered comment
app.A.II.-2.
A. General formula. Comment app.A.II.A.-1 provides guidance about
the treatment of accrued, but uncredited, interest in the balances used
to calculate the APYE. The FRB believes an inaccurate APYE would result
if institutions include accrued interest in the balance figure when
statements are sent less frequently than interest is credited. But when
periodic statements are issued more frequently than interest is
credited, accrued interest must be included in the balance figure for
APYE computation purposes. The NCUA adopts the Regulation DD position.
B. Special formula for use where periodic statements are sent more
often than the period for which dividends are compounded. Comment
app.A.II.B.-1 has been adopted as proposed. Credit unions may use the
special formula to calculate an APYE on a quarterly statement whether
or not a monthly statement is triggered by Regulation E during the
quarter. FRB commenters supported this rule as significantly reducing
compliance burdens for institutions. For the same reasons, NCUA adopts
the Regulation DD position.
Comment app.A.II.B.-2 clarifies that the special formula requires
institutions to use the actual number of days in the compounding period
in calculating the APYE. The FRB believes using the actual number of
days in a compounding period is necessary to produce an accurate APYE
for a specific consumer's account. For reasons of conformity and
parity, NCUA has also adopted the Regulation DD position.
Appendix B--Model Clauses and Sample Forms
Comments to Appendix B have been adopted as proposed. Several
commenters requested changes in the Appendix B forms and sample
clauses. However, as these changes were beyond the scope of this
rulemaking, the Board could not consider them at this time. The Board
will consider inviting comment upon the Appendix B forms and clauses at
some future date.
Paperwork Reduction Act
Office of Management and Budget approval under the Paperwork
Reduction Act for part 707 was received on September 29, 1994 as OMB
No. 3133-0134.
List of Subjects in 12 CFR Part 707
Advertising, Credit unions, Consumer protection, Deposit accounts,
Interest, Interest rates, Truth in savings.
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR part 707 as follows:
PART 707--TRUTH IN SAVINGS
1. The authority citation for part 707 would continue to read as
follows:
Authority: 12 U.S.C. 4311.
2. Section 707.2 is amended by revising paragraphs (a) and (q) to
read as follows:
Sec. 707.2 Definitions.
* * * * *
(a) Account means a share or deposit account at a credit union held
by or offered to a member or potential member. It includes, but is not
limited to, accounts such as share, share draft, checking and term
share accounts. For purposes of the advertising regulations in
Sec. 707.8, the term also includes an account at a credit union that is
held by or offered by a share or deposit broker.
* * * * *
(q) Member means:
(1) A natural person member of the credit union who holds an
account primarily for personal, family, or household purposes;
(2) A natural person nonmember who holds an account primarily for
personal, family, or household purposes, either jointly with a natural
person member or in a credit union designated as a low-income credit
union, or to whom such an account is offered; and
(3) A natural person nonmember who holds a deposit account in a
state-chartered credit union pursuant to state law, or to whom such
deposit account is offered.
The term does not include a natural person who holds an account for
another in a professional capacity or an unincorporated nonbusiness
association of natural person members.
* * * * *
3. Section 707.6 is amended by revising paragraph (b)(3) to read as
follows:
Sec. 707.6 Statement disclosures.
* * * * *
(b) * * *
(3) Fees imposed. Fees required to be disclosed under
Sec. 707.4(b)(4) of this part and imposed on the account during the
statement period. The fees shall be itemized by type and dollar
amounts.
* * * * *
4. Part 707 is amended by adding a new Appendix C to Part 707 to
read as follows:
Appendix C to Part 707--Official Staff Interpretations
Introduction
1. Official status. This commentary is the means by which the
staff of the Office of General Counsel of the National Credit Union
Administration issues official staff interpretations of Part 707 of
the NCUA Rules and Regulations. Good faith compliance with this
commentary affords protection from liability under section 271(f) of
the Truth in Savings Act (TISA), 12 U.S.C. 4311.
Section 707.1--Authority, Purpose, Coverage, and Effect on State Laws
(c) Coverage
1. Foreign applicability. Part 707 applies to all credit unions
that offer share and deposit accounts to residents (including
resident aliens) of any state as defined in Sec. 707.2(v) and that
offer accounts insurable by the National Credit Union Share
Insurance Fund (NCUSIF) whether or not such accounts are insured by
the NCUSIF. Corporate credit unions designated as such by NCUA under
12 CFR 704.2 (definition of ``corporate credit union'') are exempt
from part 707.
2. Persons who advertise accounts. Persons who advertise
accounts are subject to the advertising rules. This includes agent
and agented accounts, such as a member who subdivides interests in a
jumbo term share certificate account for sale to other parties or
among members who form a certificate account investment club. For
example, if an agent places an advertisement that offers members an
interest in an account at a credit union, the advertising rules
apply to the advertisement, whether the account is held by the agent
or directly by the member.
(d) Effect on State Laws
1. Preemption of state laws/Inconsistent requirements. State law
requirements that are inconsistent with the requirements of TISA and
part 707 are preempted to the extent of the inconsistency. A state
law is inconsistent if it requires a credit union to make
disclosures or take actions that contradict the requirements of the
federal law. A state law is also contradictory if it requires the
use of the same term to represent a different amount or a different
meaning than the federal law, requires the use of a term different
from that required in the federal law to describe the same item, or
permits a method of calculating dividends or interest on an account
different from that required in the federal law.
2. Preemption determinations. A credit union, state, or other
interested party may request the Board to determine whether a state
law requirement is inconsistent with the federal requirements. A
request for a determination should be addressed to NCUA's Office of
General Counsel, 1775 Duke Street, Alexandria, VA 22314. Written
preemption requests should cite (or include a copy of) the allegedly
inconsistent state law, demonstrate the inconsistency with TISA and
part 707 and the burden on credit unions, and formally request a
preemption determination. The Office of General Counsel may provide
other interested parties, particularly affected states, an informal
opportunity to comment on any request for a preemption
determination, unless it finds that such notice and opportunity for
comment would be impracticable, unnecessary, or contrary to the
public interest. NCUA will publicize any preemption determinations
using any means readily at its disposal.
3. Effect of preemption determinations. After the Board, through
its Office of General Counsel, determines that a state law is
inconsistent, a credit union may not make disclosures using the
inconsistent term or take actions relying on the inconsistent law.
4. Reversal of determination. The Board reserves the right to
reverse a determination for any reason bearing on the coverage or
effect of state or federal law.
Section 707.2--Definitions
(a) Account
1. Covered accounts. Examples of accounts subject to the
regulation are:
i. Dividend-bearing and interest-bearing accounts.
ii. Non-dividend-bearing and non-interest-bearing accounts.
iii. Accounts opened as a condition of obtaining a credit card.
iv. Escrow accounts with a consumer purpose, such as an account
established by a member to escrow rental payments, pending
resolution of a dispute with the member's landlord.
v. Accounts held by a parent or custodian for a minor under a
state's Uniform Gift to Minors Act (or Uniform Transfers to Minors
Act).
vi. Individual retirement accounts (IRAs) and simplified
employee pension (SEP) accounts.
vii. Payable-on-Death (POD) or ``Totten trust'' accounts.
2. Other accounts. Examples of accounts not subject to the
regulation are:
i. Mortgage escrow accounts for collecting taxes and property
insurance premiums.
ii. Accounts established to make periodic disbursements on
construction loans.
iii. Trust accounts opened by a trustee pursuant to a formal
written trust agreement (not merely declarations of trust on a
signature card such as a ``Totten trust,'' or an IRA or SEP
account).
iv. Accounts opened by an executor in the name of decedent's
estate.
v. Accounts of individuals operating businesses as sole
proprietors.
vi. Certificates of indebtedness. Some credit unions borrow
funds from their members through a certificate of indebtedness that
sets forth the terms and conditions of the repayment of the
borrowing, such as federal credit unions do through 12 CFR 701.38.
Such an account does not represent an account in a credit union and
is not covered by part 707.
vii. Unincorporated nonbusiness association accounts.
3. Other investments. The term ``account'' does not apply to
these products. Examples of products not covered are:
i. Government securities.
ii. Mutual funds.
iii. Annuities.
iv. Securities or obligations of a credit union.
v. Contractual arrangements such as repurchase agreements,
interest rate swaps, and bankers acceptances.
vi. Purchases of U.S. Savings Bonds through a credit union.
vii. Services offered through a group purchasing plan or a
credit union service organization (CUSO).
4. Options. All dividend-bearing and interest-bearing accounts
are either fixed-rate or variable-rate accounts.
5. Use of synonyms. Generally, it is not the purpose of part 707
to prohibit specific descriptive terms for accounts. For example,
credit unions can use adjectives and trade names to describe
accounts such as ``Best Share Draft Account,'' or ``Ultra Money
Market Share Account.'' Synonyms for share, share draft, money
market share, and term share accounts may be used to describe
various types of credit union share and deposit accounts as long as
the synonym is accurate and not misleading. For example, the
following synonyms may be used:
i. The term ``checking account'' may be used to describe share
draft accounts.
ii. The term ``money market account'' may be used to describe
money market share accounts.
iii. The term ``savings account'' may be used to describe
regular share and share accounts.
iv. The terms ``share certificate,'' ``certificate account,'' or
``certificate'' may be used to describe share certificates and other
dividend-bearing term share accounts.
v. However, under no circumstances may a credit union describe a
share account as a deposit account, or vice versa. For example, the
term ``certificate of deposit'' or ``CD'' may not be used to
describe share certificates and other dividend-bearing term share
accounts. Similarly, the terms ``time account'' (used in Regulation
DD, 12 CFR 230.2(u)) and ``time deposit'' (used in Regulation D, 12
CFR 204.2(c)) may not be used to describe term share accounts.
(b) Advertisement
1. Covered messages. Advertisements include commercial messages
in visual, oral, or print media that invite, offer, or otherwise
announce generally to members and potential members the availability
of member accounts such as:
i. Telephone solicitations.
ii. Messages on automated teller machine (ATM) screens
(including any printout).
iii. Messages on a computer screen in a credit union's lobby
(including any printout) other than a screen viewed solely by the
credit union's employee.
iv. Messages in a newspaper, magazine, or promotional flyer or
on radio or television.
v. Messages promoting an account that are provided along with
information about the member's existing account at a credit union
and that promote another account at the credit union (such as
account promotional messages on the periodic statement).
2. Other messages. Examples of messages that are not
advertisements are:
i. Rate sheets published in newspapers, periodicals, or trade
journals (unless the credit union or share and deposit broker that
offers accounts at the credit union pays a fee to have the
information included or otherwise controls publication).
ii. Telephone conversations initiated by a member or potential
member about an account.
iii. An in-person discussion with a member about the terms for a
specific account.
iv. Information provided to members about their existing
accounts, such as on IRA disbursements, notices for automatically
renewable term share accounts sent before renewal, or current rates
recorded on a voice response machine.
(c) Annual Percentage Yield.
1. General. The annual percentage yield (APY) is required for
disclosures for new accounts, oral responses to inquiries about
rates; disclosures provided upon request; initial disclosures (if
the credit union chooses to provide full disclosures instead of the
abbreviated notice); notices prior to the renewal of a term share
account, if known at the time the notice is sent, and in
advertising. The annual percentage yield shows the total amount of
dividends for a 365 day period (or a 366 day period for a leap year)
on an assumed principal amount based on the dividend rate and
frequency of compounding as a percentage of the assumed principal
(for accounts such as share or share draft accounts) or for the
total amount of dividends over the term of the account for term
share accounts. The annual percentage yield assumes the principal
amount remains in the account for 365 days (366 days for leap year)
or for the term of the account.
2. How Annual Percentage Yield Differs from Annual Percentage
Yield Earned. The annual percentage yield (APY) differs from the
annual percentage yield earned (APYE). The annual percentage yield
earned is required for periodic statements only. The annual
percentage yield earned shows the total amount of dividends earned
for the dividend or statement period as a percent of the actual
average daily balance in the member's account. Unlike the annual
percentage yield, the annual percentage yield earned is affected by
additions and withdrawals during the period. The annual percentage
yield and the annual percentage yield earned must be calculated
according to the formulas provided in Appendix A to this rule.
(d) Average Daily Balance Method
1. General. One of the two required methods (the daily balance
is the other) of determining the balance upon which dividends must
be accrued and paid. The average daily balance method requires the
application of a periodic rate to the average daily balance in the
account for the average daily balance calculation period. The
average daily balance is determined by adding the full amount of
principal in the account for each day of the period and dividing
that figure by the number of days in the period.
(e) Board.
1. General. The NCUA Board.
(f) Bonus
1. General. Bonuses include items of value offered as incentives
to members, such as an offer to pay the final installment deposit
for a holiday club account if the final installment is over $10.
Bonuses do not include the payment of dividends (including
extraordinary dividends), the waiver or reduction of a fee, the
absorption of expenses, non-dividend membership benefits, or other
consideration aggregating $10 or less per year.
2. Examples. The following are examples of bonuses.
i. A credit union offers $25 to potential members for becoming a
member and opening an account. The $25 could be provided by check,
cash, or direct deposit.
ii. A credit union offers $25 to a member with only a regular
share account to open a share draft account. The $25 could be
provided by check, cash, or direct deposit.
iii. A credit union offers a portable radio with a value of $20
to members and potential members for opening a share draft account.
iv. A credit union pays the final installment deposit for a
holiday club account if over $10.
3. Examples not comprising bonuses. The following are examples
of items that are not bonuses:
i. Discount coupons distributed by credit unions for use at
restaurants or stores.
ii. A credit union offers $20 to any member if the member is
responsible for encouraging a potential member to open an account.
The $20 is not a bonus because the $20 is not paid to the individual
opening the account. Any item, including cash, given or offered to a
third party (that is not a joint member or joint owner in an account
being opened) in exchange for a member or potential member opening
(or a member renewing or adding to) an account is not a bonus.
iii. A credit union offers $25 to a member if the member can
locate his name in the body of a newsletter.
iv. Life savings benefits. Many credit unions offer life savings
benefits to beneficiaries of deceased members. Because the benefit
accrues to a third party, such life savings plans offered are not
bonuses.
v. A credit union offers to pay annual membership dues in a
benevolent organization for a class of members.
4. De minimis rule. Items with a de minimis value of $10 or less
are not bonuses. Credit unions may rely on the valuation standard
used by the Internal Revenue Service (IRS) to determine if the value
of the item is de minimis. Items required to be reported by the
credit union under IRS rules are bonuses under this regulation.
Examples of items of de minimis values are:
i. Disability insurance premiums on a share account valued at an
amount of $10 or less per year.
ii. Coffee mugs, T-shirts or other merchandise with a market
value of $10 or less per year.
5. Aggregation. In determining if an item valued at $10 or less
is a bonus, credit unions must aggregate per account per calendar
year items that may be given to members. In making this
determination, credit unions aggregate per account only the market
value of items that may be given for a specific promotion. To
illustrate, assume a credit union offers in January to give members
an item valued at $7 for each calendar quarter during the year that
the average account balance in a share draft account exceeds
$10,000. The bonus rules are triggered, since members are eligible
under the promotion to receive up to $28 during the year. However,
the bonus rules are not triggered if an item valued at $7 is offered
to members opening a share draft account during the month of
January, even though in November the credit union introduces a new
promotion that includes, for example, an offer to existing share
draft accountholders for an item valued at $8 for maintaining an
average balance of $5,000 for the month.
6. Waiver or reduction of a fee or absorption of expenses.
Bonuses do not include value received by members through the waiver
or reduction of fees for credit union-related services (even if the
fees waived exceed $10), such as the following:
i. Waiving a safe deposit box rental fee for one year for
members who open a new account.
ii. Waiving fees for travelers checks for members, and waiving
check and share draft printing fees.
iii. Nondiscriminatorily waiving all fees for a particular class
of members, such as seniors or minors.
iv. Discounts on interest rates charged for loans at the credit
union.
v. Rebates of loan interest already paid by a member.
vi. Discounts on application fees charged for loans at the
credit union.
vii. Packaged, linked, or tied-account services.
7. Non-dividend membership benefits. Such benefits are not
bonuses because they are sporadic in nature, often difficult to
value, and providing non-dividend membership benefits is a long-
standing unique credit union practice. (See commentary to
Sec. 707.2(r) for examples of such benefits.)
(g) Credit Union
1. General. Includes credit unions in the United States, Puerto
Rico, Guam, U.S. Virgin Islands, and U.S. territories. Applies to
credit unions whether or not the accounts in the credit union are
federally, state, privately insured, or uninsured.
(h) Daily Balance Method
1. General. One of the two required methods (the average daily
balance is the other) of determining the balance upon which
dividends must be accrued and paid. The daily balance method
requires the application of a daily periodic rate to the full amount
of principal in the account each day.
(i) Dividend and Dividends
1. General. Member savings placed in share accounts are equity
investments, and the returns earned on these accounts are dividends.
Federal credit unions may only offer dividend-bearing and non-
dividend-bearing share accounts. State-chartered credit unions may
offer both share and deposit accounts if permitted by state law.
State law, including without limitation regulations and official
interpretations, will determine if returns earned in accounts in
state-chartered credit unions are dividends. Dividends exclude the
payment of a bonus or other consideration worth $10 or less given
during a year, the waiver or reduction of a fee, the absorption of
expenses, non-dividend membership benefits and extraordinary
dividends. Dividend-bearing accounts must be either fixed-rate or
variable-rate accounts.
2. Procedure. Credit unions must follow appropriate law (state
law for state-chartered credit unions and federal law for federal
credit unions) in determining dividend policies and declaring
dividends. Generally, dividends may be viewed as a portion of the
available account and undivided earnings of the credit union which
is set apart, after required transfer to reserves, by valid act of
the board of directors, for distribution among the members. As a
matter of legal procedure, members are usually not entitled to
dividends until the following steps are completed: (1) The board of
the credit union develops a nondiscriminatory dividend policy, by
establishing dividend periods, dividend credit determination dates
dividend distribution dates, any associated penalties (if
applicable), and the method of dividend computation for each type of
share account; (2) the provisions for required transfers to reserves
are made; (3) sufficient and available prior and/or current earnings
are available at the end of the dividend period; (4) the board
formally makes a dividend declaration in accordance with the credit
union's dividend policy; and (5) dividends must be paid to members
by a credit to the appropriate share account, payment by check or
share draft, or by a combination of the two methods.
3. When available. Credit unions must follow the law of their
primary chartering authority to determine when dividends are
available. Generally, it is the declaration of the dividend itself
which creates the dividend and the member has no right to receive a
dividend until it is so declared. The decision of when to declare
dividends lies within the official discretion of each credit union's
board of directors and cannot be abrogated by contract. An agreement
to pay dividends on a share account is generally interpreted not as
an obligation to pay the stipulated dividends absolutely and
unconditionally, but as an undertaking to pay them out of the
earnings when sufficiently accumulated from which dividends in
general are properly payable. Generally, ``prospective rates'' are
rates set in good faith in advance of the close of a dividend
period, that may be altered if sufficient funds are not available,
or in the event of a superseding event, such as a strike, plant
closure, significant fluctuation in market rates and/or a
significant change in financial structure, natural disaster or
emergency that alters the assumptions under which the ``prospective
rates'' were made. It is the intent of TISA that all disclosure be
accurate when made, and credit unions are urged to make every effort
to ratify disclosed ``prospective rates.'' ``Prospective rates'' may
also be referred to as ``projected rates'' or similar wording, but
not as ``estimated rates.'' (See comment 3(b)-2, prohibiting use of
estimates).
4. Sample dividend resolutions. (i) The following resolution may
be used where the dividend rates are set after the close of a
dividend period.
Resolution of Board of Directors for the Declaration of Dividends
A. I, ________________, certify that I am Secretary of
________________ Credit Union Board of Directors, and that the
following is a correct copy of the resolution for declaring dividend
adopted by the ________________ Credit Union at a meeting of the
Board of Directors duly and properly held on ____________, 19______.
This resolution appears in the minutes of this meeting and has not
been rescinded or modified.
B. Resolved, that
(1) The Board of Directors has developed a nondiscriminatory
dividend policy, by establishing dividend periods, dividend credit
determination dates, dividend distribution dates, any associated
penalties (if applicable), and the method of dividend computation
for each type of share account;
(2) The required transfers to reserves have been made; and
(3) Sufficient and available prior and/or current earnings are
available at the end of this dividend period.
C. Resolved, further, that the Board of Directors now formally
makes a dividend declaration in accordance with the Credit Union's
dividend policy and authorizes that on ____________, 19______,
dividends must be paid to members by a credit to the appropriate
share account, payment by share draft or by a combination of the two
methods.
D. I further certify that the Board of Directors of this Credit
Union has, and the time of adoption of this resolution had, full
power and lawful authority to adopt the foregoing resolutions and
that this resolution revokes any prior resolution.
In witness whereof, this is my signature and the date on which I
signed this Resolution.
----------------------------------------------------------------------
Signature
----------------------------------------------------------------------
Date
[Attach list of accounts with dividend rates for each type of
account.]
(ii) The following resolution may be used where the dividend
rates are set before the close of a dividend period.
Resolution of Board of Directors for the Declaration of Dividends
A. I, ________________, certify that I am the Secretary of
________________ Credit Union, and that the following is a correct
copy of the resolution for declaring dividends adopted by the
________________ Credit Union at a meeting of the Board of Directors
duly and properly held on ________________, 19________________. This
resolution appears in the minutes of that meeting and has not been
rescinded or modified.
B. Resolved, that the Board of Directors has adopted a
nondiscriminatory dividend policy, by establishing dividend periods,
dividend credit determination dates, dividend distribution dates,
any associated penalties (if applicable) and the method of dividend
computation for each type of share account.
C. Resolved, that it is the policy and practice of the Board of
Directors to meet periodically to establish prospective dividend
rates for each type of dividend-bearing share account.
D. Resolved, that if the required transfers to reserves have
been made and there are sufficient and available prior and/or
current earnings available at the end of a dividend period, the
officers of the Credit Union are authorized to pay dividends at the
rate prospectively established by the Board of Directors for each
account for the dividend period. The officers may pay the dividends
without any further action of the Board of Directors. The act of
paying the dividends shall constitute the declaration of the
dividends and shall be a ratification of the prospective dividend
rate.
In witness whereof, this is my signature and the date on which I
signed this Resolution.
----------------------------------------------------------------------
Signature
----------------------------------------------------------------------
Date
[Attach list of accounts with prospective dividend rates for each
type of account.]
5. Referencing. Except where specifically stated otherwise, use
of the term ``share'' in part 707, as in ``share account,'' also
refers to ``deposit,'' as in ``deposit account,'' where appropriate
(for interest-bearing or non-interest-bearing deposit accounts at
some state-chartered credit unions).
(j) Dividend Declaration Date
1. General. The importance of the dividend declaration date is
to tie the last paid dividend to a certain period of time to place
members and potential members on notice that the last paid dividend
is different from the next dividend to be paid. In order to achieve
this purpose, a credit union may use any of the following methods:
i. ``As of 3/15/95'' (the date the board of directors last met
and declared the last paid dividend).
ii. ``As of 3/31/95'' (the last day of the last dividend period
upon which a dividend has been paid).
iii. ``For the period 1/1/95 to 3/31/95'' (the last dividend
period upon which a dividend has been paid).
iv. ``For the first quarter of 1995'' (the last dividend period
upon which a dividend has been paid).
v. ``For April 1995'' (the last dividend period upon which a
dividend has been paid).
(k) Dividend Period
1. General. The dividend period is to be set by a credit union's
board of directors for each account type, e.g., regular share, share
draft, money market share, and term share. The most common dividend
periods are weekly, monthly, quarterly, semi-annually, and annually.
Dividend periods need not agree with calendar months, e.g., a
monthly dividend period could begin March 15 and end April 14.
(l) Dividend Rate
1. General. The dividend rate does not reflect compounding.
Compounding is reflected in the ``annual percentage yield''
definition.
2. Referencing. Except where specifically stated otherwise, use
of the term ``dividend rate'' in part 707 also refers to ``interest
rate,'' where appropriate (for interest-bearing and non-interest-
bearing deposit accounts at some state-chartered credit unions).
(m) Extraordinary Dividends
1. General. The definition encompasses all irregularly scheduled
and declared dividends, and as dividends, extraordinary dividends
are exempt from the ``bonus'' disclosure requirements. Extraordinary
dividends do not have to be disclosed on account disclosures, but
the dollar amount of an extraordinary dividend credited to the
account during the statement period does have to be separately
disclosed on the periodic statement for the dividend period during
which the extraordinary dividends are earned. Extraordinary
dividends, like ordinary dividends, do not include the payment of a
bonus or other consideration worth $10 or less given during a year,
the waiver or reduction of a fee, the absorption of expenses or non-
dividend membership benefits. See comments 2(f) 1 through 7 and 2(i)
1 through 4. Extraordinary dividends may be calculated by any means
determined by the board of directors of a credit union and may not
be used in the annual percentage yield earned calculation.
2. Use of synonym. Extraordinary dividends may be described as
``bonus dividends.''
(n) Fixed-Rate Account
1. General. Includes all accounts in which the credit union, by
contract, agrees to give at least 30 days advance written notice of
decreases in the dividend rate. Thus, credit unions can decrease
rates only after providing advance written notice of rate decreases,
e.g., a ``change-in-terms notice.''
(o) Grace Period
1. General. A period after maturity of an automatically renewing
term share account during which the member may withdraw funds
without being assessed a penalty. Use of a ``grace period'' is
discretionary, not mandatory. This definition does not refer to the
``grace period'' account, which is a synonym for ``federal rollback
method'' or ``in by the 10th'' accounts, which are prohibited by
TISA and part 707.
(p) Interest
1. General. Member savings placed in deposit accounts are debt
investments, and the return earned on these accounts is interest.
Federal credit unions are not authorized to offer any interest-
bearing deposit accounts. State-chartered credit unions may offer
both share and deposit accounts if permitted by state law. State
law, including without limitation regulations and official
interpretations, will determine if returns earned in accounts in
state-chartered credit unions are interest. Interest excludes the
payment of a bonus or other consideration worth $10 or less given
during a year, the waiver of reduction of a fee, the absorption of
expenses, non-dividend membership benefits, and extraordinary
dividends.
2. Differences between dividends and interest. Generally,
dividends are returns on an equity investment (shares); interest is
return on a debt investment (deposits). Dividends, in general, are
not properly payable until declared at the close of a dividend
period; interest, in general, is properly payable daily according to
the deposit contract. Dividend rates are prospective until actually
declared; interest rates are set according to contract in advance
and are earned on that basis. Share accounts establish a member
(owner)/credit union (cooperative) relationship; deposit accounts
establish a depositor (creditor)/depository (debtor) relationship.
3. Referencing. Except where specifically stated otherwise, use
of the terms ``dividend'' or ``dividends'' in part 707 also refers
to ``interest'' where appropriate (for interest-bearing and non-
interest-bearing deposit accounts at some state-chartered credit
unions).
(q) Member
1. Professional capacity. Examples of accounts held by a natural
person in a professional capacity for another are:
i. Attorney-client trust accounts.
ii. Trust, estate and court-ordered accounts.
iii. Landlord-tenant security accounts.
2. Other accounts. Examples of accounts not held in a
professional capacity include accounts held by parents for a child
under the Uniform Gifts to Minors Act (or Uniform Transfers to
Minors Act.
3. Retirement plans. IRAs and SEP accounts are member accounts
to the extent that funds are invested in accounts subject to the
regulation. Keogh accounts, like sole proprietor accounts, are not
subject to the regulation.
(r) Non-Dividend Membership Benefits
1. General. Term reflects unique credit union practices that are
difficult to value, encourage community spirit, and are not granted
in such quantity as to be includable as calculable dividends.
2. Examples. Examples include:
i Food, refreshments, and drawings and raffles at annual
meetings, member functions, and branch openings.
ii. Travel club benefits.
iii. Prizes offered at annual meetings, such as U.S. Savings
Bonds, a deposit of funds into the winner's account, trips, and
other gifts. Such prizes are not bonuses because they are offered as
an incentive to increase attendance at the annual meeting, and not
to entice members to open, maintain, or renew accounts or increase
an account balance.
iv. Life savings benefits.
(s) Passbook Account
1. Relation to Regulation E. Passbook accounts include accounts
accessed by preauthorized electronic fund transfers to the account
(as defined in 12 CFR Sec. 205.2(j)), such as an account credited by
direct share and deposit of social security payments. Accounts that
permit access by other electronic means are not ``passbook
accounts,'' and any statements that are sent four or more times a
year must comply with the requirements of Sec. 707.6.
(t) Periodic Statement
1. General. Periodic statements are not required by part 707.
Passbook and term share accounts are exempt from periodic statement
requirements.
2. Examples. Periodic statements do not include:
i. Additional statements provided solely upon request.
ii. Information provided by computer through home electronic
credit union account services.
iii. General service information such as a quarterly newsletter
or other correspondence that describes available services and
products.
(u) Potential Member
1. General. A potential member is a natural person eligible for
membership in a credit union, who has not yet taken the steps
necessary to become a member. The term also includes natural person
nonmembers eligible to hold accounts in a credit union pursuant to
relevant federal or state law.
2. Verification of eligibility. It is recommended that credit
unions have sound written procedures in place to identify those
eligible for membership. If these procedures include verification
measures, such as an application process, verification telephone
call or letter to an employer or association within the field of
membership, witnessing by an existing member, or similar procedure,
then the credit union may first verify the membership eligibility of
a potential member before providing account disclosures or other
information to the potential member. This process of verifying a
member's eligibility status, making a recommendation for membership,
and providing account disclosures should be completed within 20
calendar days. This period also applies when potential members not
on credit union premises request disclosures.
3. Nonmembers. Within its sole discretion, the board of
directors of a credit union may provide TISA disclosures to
nonmembers who are ineligible for membership or to hold an account
at the credit union. If disclosures are made to such nonmembers, it
is the position of the Board that no civil liability can accrue to
the credit union for any errors in such disclosures. (See commentary
to Sec. 707.3(d)).
(v) State
1. General. Territories and possessions include American Samoa,
Guam, the Mariana Islands, and the Marshall Islands.
(w) Stepped-Rate Account
1. General. Stepped-rate accounts are those accounts in which
two or more dividend rates (known at the time the account is opened)
will take effect in succeeding periods.
2. Example. An example of a stepped-rate account is a one-year
term share certificate account in which a 5.00% dividend rate is
paid for the first six months, and 5.50% for the second six months.
(x) Term Share Account
1. Relation to Regulation D. Regulation D permits, in limited
circumstances, the withdrawal of funds without penalty during the
first six days after a ``time deposit'' is opened. (See 12 CFR
204.2(c)(1)(i).) But the fact that a member makes a withdrawal as
permitted by Regulation D does not disqualify the account from being
a term share account for purposes of this regulation (such as
withdrawals upon the death of the member, or within a ``grace
period'' for automatically renewable term share accounts).
2. Club accounts. Club accounts, including Christmas club,
holiday club, and vacation club accounts may be either term share or
regular share accounts, depending on the terms of the account.
Although club accounts typically have a maturity date, they are not
term share accounts unless they also require a penalty of at least
seven days' dividends for withdrawals during the first six days
after the account is opened.
(v) Tiered-Rate Account
1. General. Tiered-rate accounts are those accounts in which two
or more dividend rates are paid on the account and are determined by
reference to a specified balance level. Tiered-rate accounts are of
two types: Tiering Method A and Tiering Method B. In Tiering Method
A accounts, the credit union pays the applicable tiered dividends
rate on the entire amount in the account. This method is also known
as the ``hybrid'' or ``plateau'' tiered-rate account. In Tiering
Method B accounts, the credit union does not pay the applicable
tiered dividends rate on the entire amount in the account, but only
on the portion of the share account balance that falls within each
specified tier. This method is also known as the ``pure'' or
``split-rate'' tiered-rate account. (See commentary to Appendix A,
Sec. I, D.)
2. Example. An example of a tiered-rate account is one in which
a credit union pays a 5.00% dividend rate on balances below $1,000,
and 5.50% on balances $1,000 and above.
3. Term share accounts. Term share accounts that pay different
rates based solely on the amount of the initial share and deposit
are not tiered-rate accounts.
4. Minimum balance accounts. A requirement to maintain a minimum
balance to earn dividends does not make an account a tiered-rate
account. If dividends are not paid on amounts below a specified
balance level, then the account has a minimum balance requirement
(required to be disclosed under Sec. 707.4(b)(3)(i)), but the
account does not constitute a tiered-rate account. A zero rate (0%)
cannot constitute a tier. Minimum balance accounts are single rate
accounts with a minimum balance requirement.
(z) Variable-Rate Account
1. General. Includes accounts in which the credit union does not
contract to give at least 30 days advance written notice of
decreases in the dividend rate. An account meets this definition
whether the rate change is determined by reference to an index, by
use of a formula, or merely at the discretion of the credit union's
board of directors. An account that permits one or more rate
adjustments prior to maturity at the member's option, such as a rate
relock option, is a variable-rate account.
2. Differences between fixed-rate and variable-rate accounts.
All ccounts must either be fixed-rate or variable-rate accounts.
Classifying an account as variable-rate affects credit unions three
ways:
i. Additional account disclosures are required
(Sec. 707.4(b)(1)(ii));
ii. Rate decreases are exempted from change-in-terms
requirements (Sec. 707.5(a)(2)(i)); and
iii. Advertising notice required (Sec. 707.8(c)(1)).
Fixed-rate accounts require a contract term obligating the
credit union to a 30-day advance, written notice to members before
decreasing the dividend rate on the account. Term changes adversely
affecting the member and rate decreases cannot take effect until 30
days after such fixed-rate change-in-terms notices are mailed or
delivered to members (Sec. 707.5(a)).
Section 707.3--General Disclosure Requirements
(a) Form
1. General. Alal required disclosures (e.g., account
disclosures, change-in-terms notices, term share renewal/maturity
notices, statement disclosures and advertising disclosures) must be
made clearly and conspicuously, in a form the member may retain.
Disclosures need be made only as applicable (e.g., disclosures for a
non-dividend-bearing account would not include disclosure of annual
percentage yield, dividend rate, or other disclosures pertaining to
dividend calculations).
2. Design requirements. Disclosures must be presented in a
format that allows members and potential members to readily
understand the terms of their account. Credit unions are not
required to use a particular type size or typeface, nor are credit
unions required to state any term more conspicuously than any other
term. Disclosures may be made:
i. In any order.
ii. In combination with other disclosures or account terms.
iii. In combination with disclosures for other types of
accounts, as long as it is clear to members and potential members
which disclosures apply to their account.
iv. On more than one page and on the front and reverse sides.
v. By using inserts to a document or filling in blanks.
vi. On more than one document, as long as the documents are
provided at the same time.
3. Consistent terminology. A credit union must use the same
terminology to describe terms or features that are required to be
disclosed. For example, if a credit union describes a monthly fee
(regardless of account activity), as a ``monthly service fee'' in
account opening disclosures, the periodic statements and change-in-
terms notices must use the same terminology so that members and
potential members can readily identify the fee.
(b) General
1. Terms and conditions. Credit unions are required to have
disclosures reflect the terms of the legal obligation between the
credit union and a member at the time the member opens the account.
This provision does not impose any contract terms or supersede state
or other laws that define how the legal obligations between a credit
union and its membership are determined.
2. Specificity of legal obligation. Credit unions may refer to
the calendar month or to roughly equivalent intervals during a
calendar year as a ``month.'' Use of estimates is prohibited in TISA
disclosures.
3. Foreign language. Disclosures may be made in any foreign
language, if desired by the board of directors of a credit union.
However, disclosures must also be provided in English, upon request.
(c) Relation to Regulation E
1. General rule. Compliance with Regulation E (12 CFR part 205)
is deemed to satisfy the disclosure requirements of this regulation,
such as when:
i. A credit union changes a term that triggers a notice under
Regulation E, and the timing and disclosure rules of Regulation E
for sending change-in-terms notices.
ii. A member adds an ATM access feature to an account, and the
credit union provides disclosures pursuant to Regulation E,
including disclosure of fees before the member receives ATM access.
(See 12 CFR 205.7.)
iii. A credit union complying with the timing rules of
Regulation E discloses at the same time fees for electronic services
(such as balance inquiry fees imposed if the inquiry is made at an
ATM) that are required to be disclosed by this regulation, but not
by Regulation E.
iv. A credit union relies on Regulation E's rules regarding
disclosures of limitations on the frequency and amount of electronic
fund transfers, including security-related exceptions. But any
limitation on the number of ``intra-institutional transfers'' to or
from the member's other accounts at the credit union during a given
time period must be disclosed, even though intra-institutional
transfers are exempt from Regulation E.
(d) Multiple Members
1. General. When an account has multiple natural person member
accountholders, delivery of disclosures to any member accountholder
or agent authorized by the accountholder satisfies the disclosure
requirements of part 707.
(e) Oral Response to Inquiries
1. Application of rule. Credit unions need not provide rate
information orally. Disclosures need be made only as appropriate.
For example, the requirement to give a telephone number for a member
to call about rates for interest-bearing accounts and dividend-
bearing term share accounts, would not be necessary for members
calling the credit union for information. Also, the disclosure
reqirements are applicable only to credit union employees and
volunteers acting the in ordinary course of credit union business.
2. Relation to advertising. The advertising rules do not cover
an oral response to a question about rates.
3. Existing accounts. This paragraph does not apply to oral
responses about rate information for existing term share accounts or
accounts not currently offered. For example, if a member holding a
one-year term share account requests dividend rate information about
the account during the term, the credit union need not disclose the
annual percentage yield, unless the member is calling for rate
information under a maturity notice.
(f) Rounding and Accuracy Rules for Rates and Yields
(f)(1) Rounding
1. Permissible rounding. The annual percentage yield, annual
percentage yield earned and dividend rate must be rounded to the
nearest one-hundredth of one percentage point (.01%) when disclosed.
Examples of permissible rounding are an annual percentage yield
calculated to be 5.644%, rounded down and shown as 5.64%; 5.645%
would be rounded up and disclosed as 5.65%. For account disclosures,
the dividend rate may be expressed to more than two decimal places.
(f)(2) Accuracy
1. Annual percentage yield and annual percentage yield earned.
The tolerance for annual percentage yield and annual percentage
yield earned calculations is designed to accommodate inadvertent
errors. Credit unions may not purposely incorporate the one-
twentieth of one percentage point (.05%) tolerance into their
calculation of yields.
2. Dividend rate. There is no tolerance for an inaccuracy in the
dividend rate.
Section 707.4--Account Disclosures
(a) Delivery of Account Disclosures
(a)(1) Account Opening
1. New accounts. New account disclosures must be provided when:
i. A term share account that does not automatically rollover is
renewed by a member.
ii. A member changes the term for a renewable term share account
(from a one-year term share account to a six-month term share
account, for instance) (see comment 5(b)-5 regarding disclosure
alternatives).
iii. A credit union transfers funds from an account to open a
new account not at the member's request, unless the credit union
previously gave account disclosures and any change-in-terms notices
for the new account (e.g., funds in a money market share account are
transferred by a credit union to open a new account for the member,
such as a share draft account, because the member exceeded
transaction limitations on the money market share account).
iv. A credit union accepts a deposit from a member to an account
that the credit union had previously deemed to be ``closed,'' under
applicable federal or state law, for the purpose of treating
accrued, but uncredited, dividends as forfeited dividends. New
account numbers are not required by this requirement.
2. Acquired accounts. New account disclosures need not be given
when a credit union acquires an account through an acquisition of,
or merger with, another credit union (but see Sec. 707.5(a)
regarding advance notice requirements if terms are changed).
3. Combination disclosures. New account disclosures need not be
given when a member has already received disclosures covering
several accounts, and opens a new account properly disclosed by the
already received combination disclosures, if the new account is
opened within a reasonable amount of time after receipt of the
combination disclosures and if the received disclosures and terms
are accurate at the time the new account is opened.
(a)(2) Requests
(a)(2)(i)
1. Inquiries versus requests. A response to an oral inquiry (by
telephone or in person) about rates and yields or fees does not
trigger the duty to provide account disclosures. But, when a member
asks for written information about an account (whether by telephone,
in person, or by other means), the credit union must provide
disclosures unless the account is no longer offered to the public.
2. General requests. When member's or potential member's
request disclosures about a type of account (a share draft account,
for example), a credit union that offers several variations may
provide disclosures for any one of them. No disclosures need be made
to nonmembers, though a credit union may provide disclosures to
nonmembers within its sole discretion.
3. Timing for response. Twenty calendar days is a reasonable
time for responding to a request for account information that a
member does not make in person.
(a)(2)(ii)(A)(2)
1. Recent rates. Credit unions comply with this paragraph if
they disclose an interest rate (or dividend rate on a dividend-
bearing term share account) and annual percentage yield accurate
within the seven calendar days preceding the date they send the
disclosures.
(a)(2)(ii)(B)
1. Term. Describing the maturity of a term share account as ``1
year'' or ``6 months,'' for example, illustrates a response stating
the maturity of a term share account as a term rather than a date
(e.g., ``June 1, 1995'').
(b) Content of Account Disclosures
(b)(1) Rate Information
(b)(1)(i) Annual Percentage Yield and Dividend Rate
1. Rate disclosures. In addition to the dividend rate and annual
percentage yield, credit unions may disclose a periodic rate
corresponding to the dividend rate. No other rate or yield (such as
``tax effective yield'') is permitted. If the annual percentage
yield is the same as the dividend rate, credit unions may disclose a
single figure but must use both terms.
2. Fixed-rate accounts. For fixed-rate term share accounts
paying the opening rate until maturity, credit unions may disclose
the period of time the dividend rate will be in effect by stating,
or cross-referencing, the maturity date. For other fixed-rate
accounts, credit unions may use a date (such as ``This rate will be
in effect through June 30, 1995'') or a period (such as ``This rate
will be in effect for at least 30 days'').
3. Tiered-rate accounts. Each dividend rate, along with the
corresponding annual percentage yield for each specified balance
level (or range of annual percentage yields, if appropriate), must
be disclosed for tiered-rate accounts. (See Appendix A, Part I,
Paragraph D.)
4. Stepped-rate accounts. A single composite annual percentage
yield must be disclosed for stepped-rate accounts. (See Appendix A,
Part I, Paragraph B.) The dividend rates and the period of time each
will be in effect also must be provided. When the initial rate
offered for a specified time on a variable-rate account is higher or
lower than the rate that would otherwise be paid on the account, the
calculation of the annual percentage yield must be made as if for a
stepped-rate account. (See Appendix A, Part I, Paragraph C.)
5. Minimum balance accounts. If a credit union sets a minimum
balance to earn dividends, the credit union may, but need not, state
that the annual percentage yield is 0% for those days the balance in
the account drops below the minimum balance level when using the
daily balance method. Nor is a disclosure of 0% required for credit
unions using the average daily balance method, if the member fails
to meet the minimum balance required for the average daily balance
period.
(b)(1)(ii) Variable Rates
(b)(1)(ii)(B)
1. Determining dividend rates. To disclose how the dividend rate
is determined, credit unions must:
i. Identify the index and specific margin, if the dividend rate
is tied to an index.
ii. State that rate changes are within the credit union's
discretion, if the credit union does not tie changes to an index.
(b)(1)(ii)(C)
1. Frequency of rate changes. A credit union reserving the right
to change rates at its discretion must state the fact that rates may
change at any time.
(b)(1)(ii)(D)
1. Limitations. A floor or ceiling on rates or on the amount the
rate may decrease or increase during any time period must be
disclosed. Credit unions need not disclose the absence of
limitations on rate changes.
(b)(2) Compounding and Crediting
(b)(2)(i) Frequency
1. General. Descriptions such as ``quarterly'' or ``monthly''
are sufficient. Irregular crediting and compounding periods, such as
if a cycle is out short at year end for tax reporting purposes, need
not be disclosed.
2. Dividend period. For dividend-bearing accounts, the dividend
period must be disclosed. (A specific example must also be given,
see Appendix B, Sec. B-1(c).) The dividend period for term share
accounts generally may be disclosed as the account's term (e.g., two
years).
(b)(2)(ii) Effect of Closing an Account
1. Deeming an account closed. A credit union may, subject to
state or other law, provide in account contracts the actions by
members that will be treated as closing the account and that will
result in the forfeiture of accrued but uncredited dividends. An
example is the withdrawal of all funds from the account prior to the
date dividends are credited. Credit unions are cautioned that bylaw
requirements may prevent a credit union from deeming a member's
account closed until certain time periods are extinguished if funds
remain in a member's account. NCUA Standard FCU Bylaws, Art. III,
Sec. 3 (members have at least 6 months to replenish membership share
before membership terminates and account is deemed closed). Such
bylaw requirements may not be overridden without proper agency
approval.
(b)(3) Balance Information
(b)(3)(i) Minimum Balance Requirements
1. Par value. Credit unions must disclose any minimum balance
required to open the account, to avoid the imposition of a fee, or
to obtain the annual percentage yield. Since members cannot
generally maintain any accounts until the par value of the
membership share is paid in full, this section requires that credit
unions disclose the par value of a share necessary to become a
member and maintain accounts at the credit union. The par value of a
share and the minimum balance requirement do not have to be the same
amount (e.g., a credit union may have a $5 par value for a
membership share, in order for accounts to be opened and maintained,
and a $100 minimum balance requirement, in order for the account to
earn dividends).
2. Disclosures. The explanation of minimum balance computation
methods may be combined with the balance computation method
disclosures (Sec. 707.4(b)(3)(ii)) if they are the same. If a credit
union uses different cycles for determining minimum balance
requirements for purposes of assessing fees and for paying
dividends, the credit union must disclose the specific cycle or time
period used for each purpose (e.g., use of a midmonth statement
cycle for determining dividends, and use of a calendar month cycle
for determining fees). Credit unions may assess fees by using any
method. If fees on one account are tied to the balance in another
account, such provision must be explained (e.g., if share draft fees
are tied to a minimum balance in the regular share account (or a
combination of the share draft and regular share accounts), the
share draft account must explain that fact and how the balance in
the regular share account (or both accounts) is determined). The fee
need not be disclosed in the account disclosures if the fee is not
imposed on that account.
(b)(3)(ii) Balance Computation Method
1. Methods and periods. Credit unions may use different methods
or periods to calculate minimum balances for purposes of imposing a
fee (the daily balance for a calendar month, for example) and
accruing dividends (the average daily balance for a statement
period, for example). Each method and corresponding period must be
disclosed.
(b)(3)(iii) When dividends begin to accrue
1. Additional information. Credit unions must include a
statement as to when dividends begin to accrue for noncash deposits.
Credit unions may disclose additional information such as the time
of day after which deposits are treated as having been received the
following business day, and may use additional descriptive terms
such as ``ledger'' or ``collected'' balances to disclose when
dividends begin to accrue. Under the ledger balance method,
dividends begin to accrue on the day of deposit. Under the collected
balance methods, dividends begin to accrue when provisional credit
is received for the item deposited.
(b)(4) Fees
1. Types of fees. Fees related to the routine use of an account
must be disclosed. The following are types of fees that must be
disclosed in connection with an account:
i. Maintenance fees, such as monthly service fees.
ii. Fees related to share deposits or withdrawals.
iii. Fees for special services, such as stop payment fees, fees
for balance inquiries or verification of share and deposits, fees
associated with checks returned unpaid, fees for regularly sending
to members share drafts that otherwise would be held by the credit
union, and overdraft line of credit access fees (if charged against
the share account).
iv. Fees to open or to close an account.
v. Fees imposed upon dormant or inactive accounts.
2. Other fees. Credit unions need not disclose fees such as the
following:
i. Fees for services offered to members and nonmembers alike,
such as fees for certain travelers checks, for wire transfers and
automated clearinghouse (ACH) transfers, to process credit card cash
advances, or to handle U.S. Savings Bond Redemption (even if
different amounts are charged to members and nonmembers).
ii. Incidental fees, such as fees associated with state escheat
laws, garnishment or attorneys fees, to change names on an account,
to generate a midcycle periodic statement, to wrap loose coins, for
photocopying forms, for statements returned to the credit union
because of a wrong address, and locator fees.
2. Amount of fees. Credit unions are cautioned that merely
providing fee information in an account disclosure may not be
sufficient to gain the legal right to impose the fee involved under
applicable law. Credit unions must state the amount and conditions
under which a fee may be imposed. Naming and describing the fee
typically satisfies this requirement. Some examples are:
i. ``$4.00 monthly service fee''.
ii. $7.00 and up'' or ``fee depends on style of checks ordered''
for check printing fees.
3. Tied-accounts. Credit unions must state if fees that may be
assessed against an account are tied to other accounts at the credit
union. For example, if a credit union ties the fees payable on a
share draft account to balances held in the share draft account and
in a regular share account, the share draft account disclosures must
state that fact and explain how the fee is determined.
4. Regulation E statements. Some fees are required to be
disclosed under both Regulation E (12 CFR 205.7) and part 707. If
such fees, such as ATM transaction fees, are disclosed on a
Regulation E statement, they need not be disclosed again on a
periodic statement required under part 707.
(b)(5) Transaction Limitations
1. General rule. Examples limitations on the number of dollar
amount of share deposits or withdrawals that credit unions must
disclose are:
i. Limits on the number of share drafts or checks that may be
written on an account for a given time period.
ii. Limits on withdrawals or share deposits during the term of a
term share account.
iii. Limitations required by Regulation D, such as the number of
withdrawals permitted from money market share accounts by check to
third parties each month (credit unions need not disclose
reservation of right to require a notice for withdrawals from
accounts required by federal or state law).
(b)(6) Features of Term Share Accounts
(b)(6)(i) Time Requirements
1. ``Callable'' term share accounts. In addition to the maturity
date, credit unions must state the date or the circumstances under
which the credit union may redeem a term share account at the credit
union's option (a ``callable'' term share account).
(b)(6)(ii) Early Withdrawal Penalties
1. General. The term ``penalty'' may, but need not, be used to
describe the loss that may be incurred by members for early
withdrawal of funds from term share accounts.
2. Examples. Examples of early withdrawal penalties are:
i. Monetary penalties, such a specific dollar amount (e.g.,
``$10.00'') or a specific days' worth of dividends (e.g., ``seven
days' dividends plus accrued but uncredited dividends, but only if
the account is closed'').
ii. Adverse changes to terms such as the lowering of the
dividend rate, annual percentage yield, or reducing the compounding
or crediting frequency for funds remaining in shares or on deposit.
iii. Reclamation of bonuses.
3. Relation to rules for IRAs or similar plans. Penalties
imposed by the Internal Revenue Code for certain withdrawals from
IRAs or similar pension or savings plans are not early withdrawal
penalties for purposes of this regulation.
4. Disclosing penalties. Penalties may be stated in months,
whether credit unions assess the penalty using the actual number of
days during the period or using another method such as a number of
days that occurs in any actual sequence of the total calendar months
involved. For example, stating ``one month's dividends'' is
permissible, whether the credit union assesses 30 days' dividends
during the month of April, or selects a time period between 28 and
31 days for calculating the dividends for all early withdrawals
regardless of when the penalty is assessed.
(b)(6)(iv) Renewal Policies
1. Rollover term share accounts. Credit unions are not required
to provide a grace period, to pay dividends during the grace period,
or to disclose whether or not dividends will be paid during the
grace period. Credit unions offering a grace period on term share
accounts must give the length of the grace period. Commentary,
Appendix B, Model Clauses, Sec. B-1(i)(iv).
2. Nonrollover term share accounts. Credit unions that pay
dividends on funds following the maturity of term share accounts
that do not renew automatically need not state the rate (or annual
percentage yield) that may be paid.
(b)(7) Bonuses
1. General. Credit unions are required to state the amount and
type of bonus, and disclose any minimum balance or time requirement
to obtain the bonus and when the bonus will be provided. If the
minimum balance or time requirement is otherwise required to be
disclosed, credit unions need not duplicate the disclosure for
purposes of this paragraph.
(b)(8) Nature of Dividends
1. General. Dividends are not payable until declared and unless
sufficient current and undivided earnings are available after
required transfers to reserves at the close of a dividend period. A
disclosure explaining dividends educates members and protects credit
unions in the event that a prospective dividend cannot be paid, or
is not properly payable. This disclosure is required for all
dividend-bearing share accounts. Term share accounts need not
include a statement regarding the nature of dividends.
2. State-chartered credit unions with interest-bearing deposit
accounts. State law controls the nature of accounts (i.e., whether
an account is a share account or a deposit account). If a member of
a state-chartered credit union is opening only an interest-bearing
deposit account, or is requesting account disclosures only for an
interest-bearing deposit account (if state law requires the
depositor to hold a share account), the disclosures must generally
include the following information on any dividend-bearing share
portion of the account (e.g., membership share): the par value of a
share; a statement that the portion of the deposit that represents
the par value of the membership share will earn dividends, and that
dividends are paid from current income and available earnings after
required transfers to reserves. Further additional disclosures, such
as a separate dividend rate and annual percentage yield for the
membership share, are not required (if the additional disclosures
would agree with the remainder of the account which is invested in
an interest-bearing deposit).
(c) Notice to Existing Accountholders
1. General. Only members who receive periodic statements
(provided regularly at least four times per year) and who hold
accounts of the type offered by the credit union as of the
compliance date of part 707 (generally January 1, 1995) must receive
the notice. If following receipt of the notice members request
disclosures, credit unions have twenty calendar days from receipt of
the request to provide the disclosures. Rate and annual percentage
yield information in such disclosures must conform to that required
for disclosures upon request. As an alternative to including the
notice in or on the periodic statement, the final rule permits
credit unions to send the account disclosures themselves, as long as
they are sent at the same time as the periodic statement (the
disclosures may be mailed either with the periodic statement or
separately).
2. Form of the notice. The notice may be included on the
periodic statement, in a member newsletter, or on a statement
stuffer or other insert, if it is clear and conspicuous. The notice
cannot be sent in a separate mailing from the periodic statement.
3. Timing. The notice may accompany the first periodic statement
after the compliance date for part 707, or the periodic statement
for the first cycle beginning after that date. For example, a credit
union's statement cycle is December 15, 1994-January 14, 1995. The
statement is mailed on January 15, The next cycle is January 15,
1995 through February 14, 1995, and the statement for that cycle is
mailed on February 15. The credit union may provide the notice
either on or with the January 15 statement or on or with the
February 15 statement, as it covers the first cycle after January 1,
1995.
4. Early compliance. Credit unions that provide the notice to
existing members prior to the compliance date of part 707, must be
prepared to provide accurate and timely disclosures when, following
receipt of the notice, members ask for account disclosures. Such
disclosures must be provided even if they are requested before the
compliance date of part 707. Credit unions who provide early notice
to existing members need to comply with other aspects of part 707,
but need not provide disclosures already provided in compliance with
part 707.
Section 707.5--Subsequent Disclosures
(a) Change in Terms
(a)(1) Advance Notice required
1. Form of notice. Credit unions may provide a change-in-term
notice on or with a regular periodic statement or in another mailing
(such as a highlighted portion of a newsletter or statement stuffer
insert). If a credit union provides notice through revised account
disclosures, the changed term must be highlighted in some manner.
For example, credit unions may state that a particular fee has been
changed (also specifying the new amount) or use an accompanying
letter that refers to the changed term. Credit unions are cautioned
that unless credit unions have reserved the right to change terms in
the account agreement or disclosures, a change-in-terms notice may
not be sufficient to amend the terms under applicable law.
2. Effective date. An example of a language for disclosing the
effective date of a change is: ``As of May 11, 1995''.
3. Terms that change upon the occurrence of an event. A credit
union offering terms that will automatically change upon the
occurrence of a stated event need not send an advance notice of the
change provided the credit union fully describes the conditions of
the change in the account opening disclosures (and sends any change-
in-term notices regardless of whether the changed term affects that
member's account at that time).
4. Examples. Examples of changes not requiring an advance
change-in-terms notice are:
i. The termination of employment for employee-members for whom
account maintenance or activity fees were waived during their
employment by the credit union.
ii. The expiration of one year in a promotion described in the
account opening disclosures to ``waive $4.00 monthly service charges
for one year''.
(a)(2) No Notice Required
(a)(2)(ii) Check Printing Fees
1. Increase in fees. A notice is not required for an increase in
fees for printing share drafts (or deposit and withdrawal slips)
even if the credit union adds some amount to the price charged by
the vendor.
(b) Notice Before Maturity for Term Share Accounts Longer Than One
Month That Renew Automatically.
1. Maturity dates on nonbusiness days. In determining the term
of a term share account, credit unions may disregard the fact that
the term will be extended beyond the disclosed number of days if the
maturity date falls on a nonbusiness day. For example, a holiday or
weekend may cause a ``one-year'' term share account to extend beyond
365 days (or 366, in a leap year), or a ``one-month'' term share
account to extend beyond 31 days.
2. Disclosing when rates will be determined. Ways to disclose
when the annual percentage yield will be available include the use
of:
i. A specific date, such as ``October 28''.
ii. A date that is easily discernible, such as ``the Tuesday
prior to the maturity date stated on the notice'' or ``as of the
maturity date stated on this notice''.
3. Alternative timing rule. Under the alternative timing rule, a
credit union that offers a 10-day grace period would have to provide
the disclosures at least 10 calendar days prior to the scheduled
maturity date.
4. Club accounts. If members have agreed to the transfer of
payments from another account to a club term share account for the
next club period, the credit union must comply with the requirements
for automatically renewable term share accounts--even though members
may withdraw funds from the club account at the end of the current
club period.
5. Renewal of a term share account. In the case of a change-in-
terms that becomes effective if a rollover term share account is
subsequently renewed:
i. If the change is initiated by the credit union, the
disclosure requirements of this paragraph. (Section 707.5(a) applies
if the change becomes effective prior to the maturity of the
existing term share account.)
ii. If the change is initiated by the member, the account
opening disclosure requirements of Sec. 707.4(b). (If the notice
required by this paragraph has been provided, credit unions may give
new account disclosures or disclosures that reflect the new term.)
6. Example. If a member receives a notice prior to maturity on a
one-year term share account and requests a rollover to a six-month
account, the credit union must provide either account opening
disclosures including the new maturity date or, if all other terms
previously disclosed in the prematurity notice remain the same, only
the new maturity date.
(b)(1) Maturities of Longer Than One Year
1. Highlighting changed terms. Credit unions need not highlight
terms that have changed since the last account disclosures were
provided.
(c) Notice for Term Share Accounts One Month or Less That Renew
Automatically
1. Providing disclosures within a reasonable time. Generally, 20
calendar days after an account renews is a reasonable time for
providing disclosures. For term share accounts shorter than 20 days,
disclosures should be given prior to the next scheduled renewal
date. For example, if a term share account automatically renews
every seven days, disclosures about an account that renews on
Wednesday, December 6, 1995, should be given prior to Wednesday,
December 13, 1995.
(d) Notice Before Maturity for Term Share Accounts Longer Than One
Year That Do not Renew Automatically
1. Subsequent account. When funds are transferred following
maturity of a nonrollover term share account, credit unions need not
provide account disclosures unless a new account is established.
Section 707.6--Periodic Statement Disclosures
(a) Rule When Statement and Crediting Periods Vary
1. General. Credit unions are not required to provide periodic
statements. If they provide periodic statements, disclosures need
only be furnished to the extent applicable. For example, if no
dividends are earned for a statement period, credit unions need not
state that fact. Or, credit unions may disclose ``$0'' dividends
earned and ``0%'' annual percentage yield earned.
2. Regulation E interim statements. When a credit union provides
regular quarterly statements, and in addition provides a monthly
interim statement to comply with Regulation E, the interim statement
need not comply with this section unless it states dividend or rate
information. (See 12 CFR 205.9). For credit unions that choose not
to treat Regulation E activity statements as part 707 periodic
statements, the quarterly periodic statement must reflect the annual
percentage yield earned and dividends earned for the full quarter.
However, credit unions choosing this option need not redisclose fees
already disclosed on an interim Regulation E activity statement on
the quarterly periodic statement. For credit unions that choose to
treat Regulation E activity statements as part 707 periodic
statements, the Regulation E statement must meet all part 707
requirements.
3. Combined statements. Credit unions may provide certain
information about an account (such as a money market share account
or regular share account) on the periodic statement for another
account (such as a share draft account) without triggering the
disclosures required by this section, as long as:
i. The information is limited to information such as the account
number, the type of account, balance information, accountholders'
names, and social security or tax identification number; and
ii. The credit union also provides members a periodic statement
complying with this section for the account (the money market share
account or regular share account, in the example).
4. Other information. Additional information that may be given
on or with a periodic statement, includes:
i. Dividend rates and corresponding periodic rates to the
dividend rate applied to balances during the statement period.
ii. The dollar amount of dividends earned year-to-date.
iii. Bonuses paid (or any de minimis consideration of $10 or
less).
iv. Fees for other products, such as safe deposit boxes.
v. Accounts not covered by the periodic statement disclosure
requirements (passbook and term share accounts) may disclose any
information on the statement related to such accounts, so long as
such information is accurate and not misleading.
5. When statement and crediting periods vary. This rule permits
credit unions, on dividend-bearing share accounts, to report the
annual percentage yield earned and the amount of dividends earned on
a statement other than on each periodic statement when the dividend
period does not agree with, varies from, or is different than, the
statement period. For dividend-bearing share accounts, credit unions
may disclose the required information either upon each periodic
statement, or on the statement on which dividends are actually
earned (credited or posted) to the member's account. In addition,
for accounts using the average daily balance method of calculating
dividends, when the average daily balance period and the statement
periods do not agree, vary or are different, credit unions may also
report annual percentage yield earned and the dollar amount of
dividends earned on the periodic statement on which the dividends or
interest is earned. For example, if a credit union has quarterly
dividend periods, or uses a quarterly average daily balance on an
account, the first two monthly statements may not state annual
percentage yield earned and dividends earned figures; the third
``monthly'' statement will reflect the dividends earned and the
annual percentage yield earned for the entire quarter. The fees
imposed disclosure must be given on the periodic statement on which
they are imposed.
6. Length of the period. Credit unions must disclose the length
of both the dividend period (or average daily balance calculation
period) and the statement period. For example, a statement could
disclose a statement period of April 16 through May 15 and further
state that ``the dividends earned and the annual percentage yield
earned are based on your dividend period (or average daily balance)
for the period April 1 through April 30.''
7. Dividend period more frequent than statement period. Credit
unions that calculate dividends on a monthly basis, but send
statements on a quarterly basis, may disclose a single dividend (and
annual percentage yield earned) figure. Alternatively, a credit
union may disclose three dividends earned and three annual
percentage yield earned figures, one of each month in the quarter,
as long as the credit union states the number of days (or beginning
and ending date) in each dividend period if it varies from the
statement period.
8. Additional voluntary disclosures. For credit unions not
disclosing the annual percentage yield earned and dividends earned
on all periodic statements, credit unions may place a notice on
statements without dividends and annual percentage yield earned
figures, that the annual percentage yield earned and dollar amount
of dividends earned will appear on the first statement at the close
of the dividend (or average daily balance) period, or similar
wording. Credit unions may also choose to include a telephone number
to call for interim information, if desired by a member.
(b) Statement Disclosures
(b)(1) Annual Percentage Yield Earned
1. Ledger and collected balances. Credit unions that accrue
interest using the collected balance method may use either the
ledger or collected balance methods to determine the balance used to
determine the annual percentage yield earned. Ledger balance means
the record of the balance in a member's account, as per the credit
union's records. (The ledger balance may reflect additions and
deposits for which the credit union has not yet received final
payment). Collected balance means the record of balance in a
member's account reflecting collected funds, that is, cash or checks
deposited in the credit union which have been presented for payment
and for which payment has actually been received. (See Regulation
CC, 12 CFR 229.14).
(b)(2) Amount of Dividends or Interest
1. Definition of earned. The term ``earned'' is defined to
include dividends and interest either ``accrued'' or ``paid and
credited.'' Credit unions may use either the ``ledger'' or the
``collected'' balance for either option. (See commentary to
Sec. 707.2(t).)
2. Accrued interest. Credit unions must state the amount of
interest that accrued during the statement period, even if it was
not credited.
3. Terminology. In disclosing dividends earned for the period,
credit unions must use the term ``dividends'' or terminology such
as: ``Dividends paid,'' to describe dividends that have been
credited; ``Dividends accrued,'' to indicate that dividends are not
yet credited.
4. Closed accounts. If a member closes an account between
crediting periods and forfeits accrued dividends, the credit union
may not show any figures for ``dividends earned'' or annual
percentage yield earned for the period (other than zero, at the
credit union's option).
5. Extraordinary dividends. Extraordinary dividends are not a
component of the annual percentage yield earned or the dividend
rate, but are an addition to the member's account. The dollar amount
of the extraordinary dividends paid, denoted as a separate,
identified figure, must be disclosed on the periodic statement on
which the extraordinary dividends are earned. A credit union may
also disclose information regarding the calculation of the
extraordinary dividends, and additional annual percentage yield
earned and dividend rate figures taking into account the
extraordinary dividend, so long as such information is accurate and
not misleading.
(b)(3) Fees Imposed
1. General. Periodic statements must state fees disclosed under
Sec. 707.4(b) that were debited to the account during the statement
period, even if assessed for an earlier period.
2. Itemizing fees by type. In itemizing fees imposed more than
once in the period, credit unions may group fees if they are the
same type. But, the description must make clear that the dollar
figure represents more than a single fee, for example, ``total fees
for checks written this period.''
Examples of fees that may not be grouped together are:
i. Monthly maintenance with excess activity fees.
ii. ``Transfer'' fees, if different dollar amounts are imposed--
such as $.50 for share deposits and $1.00 for withdrawals.
iii. Fees for electronic fund transfers with fees for other
services, such as balance inquiry or maintenance fees.
3. Identifying fees. Statement details must enable the member to
identify the specific fee. For example:
i. Credit unions may use a code to identify a particular fee if
the code is explained on the periodic statement or in documents
accompanying the statement.
ii. Credit unions using debit slips may disclose the date the
fee was debited on the periodic statement and show the amount and
type of fee on the dated debit slip.
4. Relation to Regulation E. Disclosure of fees in compliance
with Regulation E complies with this section for fees related to
electronic fund transfers (for example, totaling all electronic
funds transfer fees in a single figure).
(b)(4) Length of Period
1. General. Credit unions providing the beginning and ending
dates of the period must make clear whether both dates are included
in the period. For example, stating ``April 1 through April 30''
would clearly indicate that both April 1 and April 30 are included
in the period.
2. Opening or closing an account mid-cycle. If an account is
opened or closed during the period for which a statement is sent,
credit unions must calculate the annual percentage yield earned
based on account balances for each day the account was open.
Section 707.7--Payment of Dividends
(a) Permissible Methods
1. Prohibited calculation methods. Calculation methods that do
not comply with the requirement to pay dividends on the full amount
of principal in the account each day include:
i. The ``rollback'' method, also known as the ``grace period''
or ``in by the 10th'' method, where credit unions pay dividends on
the lowest balance in the account for the period.
ii. The ``increments of par value'' method, where credit unions
only pay dividends on full shares in an account, e.g., a credit
union with $5 par value shares pays dividends on $20 of a $24
account balance.
iii. The ``ending balance'' method, where credit unions pay
dividends on the balance in the account at the end of the period.
iv. The ``investable balance'' method, where credit unions pay
dividends on a percentage of the balance, excluding an amount credit
unions set aside for reserve requirements.
v. The ``low balance'' method, where credit unions pay dividends
on the lowest balance in the account for any day in that period.
2. Use of 365-day basis. Credit unions may apply a daily
periodic rate that is greater than \1/365\ of the dividend rate--
such as \1/360\ of the dividend rate--as long as it is applied 365
days a year.
3. Periodic dividend payments. A credit union can pay dividends
each day on the account and still make uniform dividend payments.
For example, for a one-year term share account, a credit union could
make monthly dividend payments that are equal to \1/12\ of the
amount of dividends that will be earned for a 365-day period (or 11
uniform monthly payments--each equal to roughly \1/12\ of the total
amount of dividends--and one payment that accounts to the remainder
of the total amount of dividends earned for the period).
4. Leap year. Credit unions may apply a daily rate of \1/366\ or
\1/365\ of the dividend rate for 366 days in a leap year, if the
account will earn dividends for February 29.
5. Maturity of term share accounts. Credit unions are not
required to pay dividends after term share accounts mature. Examples
include:
i. During any grace period offered by a credit union for an
automatically renewable term share account, if the member decides
during that period not to renew the account.
ii. Following the maturity of nonrollover term share accounts.
iii. When the maturity date falls on a holiday, and the member
must wait until the next business day to obtain the funds.
6. Dormant accounts. Credit unions must pay dividends on funds
in an account, even if inactivity or the infrequency of transactions
would permit the credit union to consider the account to be
``inactive'' or ``dormant'' (or similar status) as defined by state
or other law or the account contract.
7. Insufficient funds. Credit unions are not required to pay
dividends on checks or share drafts deposited to a member's account
that are returned for insufficient funds. If a credit union accrues
dividends on a check that it later determines is not good, it may
deduct from the accrued dividends any dividends attributed to the
proceeds of the returned check. If dividends have already been
credited before the credit union determines the item has
insufficient funds, the credit union may deduct the amount of the
check and associated dividends from the account balance. The amount
deducted will not be reflected in the dividend amount and annual
percentage yield earned reported for the next period.
8. Account drawn below par value of a share. If a member draws
his or her account below the par value of a share, dividends would
continue to accrue on the account so long as any minimum balance
requirement is met. However, under the NCUA Standard FCU Bylaws, if
a member who reduces his or her share balance below the value of a
par value share and does not increase the balance within at least
six months, the credit union may terminate the member's membership.
State-chartered credit unions may have similar termination
provisions.
(a)(2) Determination of Minimum Balance to Earn Dividends
1. General. Credit unions may set minimum balance requirements
that must be met in order to earn dividends. However, credit unions
must use the same method to determine a minimum balance required to
earn dividends as they use to determine the balance upon which
dividends will accrue and pay. For example, a credit union that
calculates dividends on the daily balance method must use the daily
balance method to determine if the minimum balance to earn dividends
has been met. Similarly, a credit union that calculates dividends on
the average daily balance method must use the average daily balance
method to determine if the minimum to earn dividends has been met.
Credit unions may have a par value of a share that is different from
the minimum balance requirement to earn dividends. (See commentary
to Sec. 707.4(b)(3)(i)).
2. Daily balance accounts. Credit unions that require a minimum
balance to earn dividends may choose not to pay dividends for days
when the balance drops below the required minimum balance if they
use the daily balance method to calculate dividends. For example, a
credit union could set a minimum daily balance level of $200 and pay
dividends only those days the $200 daily balance is maintained.
3. Average daily balance accounts. Credit unions that require a
minimum balance to earn dividends may choose not to pay dividends
for the average daily balance calculation period in which the
average daily balance drops below the required minimum, if they use
the average daily balance method to calculate dividends. For
example, a credit union could set a minimum average daily balance
level of $200 and pay dividends only if the $200 average daily
balance is met for the calculation period.
4. Beneficial method. Credit unions may not require members to
maintain both a minimum daily balance and a minimum average daily
balance to earn dividends, such as by requiring the member to
maintain a $500 daily balance and a prescribed average daily balance
(whether higher or lower). But a credit union could offer a minimum
balance to earn dividends that includes an additional method that is
``unequivocally beneficial'' to the member such as the following:
i. A credit union using the daily balance method to calculate
dividends and requiring a $500 minimum daily balance could choose to
pay dividends on the account (for those days the minimum balance is
not met) as long as the member maintained an average daily balance
throughout the month of $400.
ii. A credit union using the average daily balance method to
calculate dividends and requiring a $400 minimum average daily
balance could choose to pay dividends on the account as long as the
member maintained a daily balance of $500 for at least half of the
days in the period.
iii. A credit union using either the daily balance method or
average daily balance method to calculate dividends that requires:
(A) a $500 daily balance; or (B) a $400 average daily balance to pay
dividends on the account.
5. Paying on full balance. Credit unions must pay dividends on
the full balance in the account that meets the required minimum
balance. For example, if $300 is the minimum daily balance required
to earn dividends, and a member deposits $500, the credit union must
pay the stated dividend rate on the full $500 and not just on the
$200.
6. Negative balances prohibited. Credit unions must treat a
negative account balance as zero to determine:
i. The daily or average daily balance on which dividends will be
paid.
ii. Whether any minimum balance to earn dividends is met. (See
commentary to Appendix A, Part II, which prohibits credit unions
from using negative balances in calculating the dividends figure for
the annual percentage yield earned.)
7. Club accounts. Credit unions offering club accounts (such as
a ``holiday'' or ``vacation'' club accounts) cannot impose a minimum
balance requirement for dividends based on the total number or
dollar amount of payments required under the club plan. For example,
if a plan calls for $10 weekly payments for 50 weeks, the credit
union cannot set a $500 minimum balance and then pay only if the
member makes all 50 payments.
8. Minimum balances not affecting dividends. Credit unions may
use the daily balance, average daily balance, or other computation
method to calculate minimum balance requirements not involving the
payment of dividends--such as to compute minimum balances for
assessing fees.
(b) Compounding and Crediting Policies
1. General. Credit unions choosing to compound dividends may
compound or credit dividends annually, semi-annually, quarterly,
monthly, daily, continuously, or on any other basis.
2. Withdrawals prior to crediting date. If members withdraw
funds (without closing the account), prior to a scheduled crediting
date, credit unions may delay paying the accrued dividends on the
withdrawn amount until the scheduled crediting date, but may not
avoid paying dividends.
3. Closed accounts. Subject to state or other law, a credit
union may choose not to pay accrued dividends if members close an
account prior to the date accrued dividends are credited, as long as
the credit union has disclosed that fact. If accrued dividends are
paid, accrued dividends must be paid on funds up until the account
is closed or the account is deemed closed. For example, if an
account is closed on a Tuesday, accrued dividends on the funds
through Monday would be paid. Whether (and the conditions under
which) credit unions are permitted to deem an account closed by a
member is determined by state or other law, if any. Credit unions
are cautioned that bylaw requirements may prevent a credit union
from deeming a member's account closed until certain time periods
are extinguished. (See NCUA Standard FCU Bylaws, Art. III, Sec. 3
(members have at least 6 months to replenish membership share before
membership can terminate and the account is deemed closed). Such
bylaw requirements may not be overridden without proper agency
approval.)
(c) Date Dividends Begin to Accrue
1. Relation to Regulation CC. Credit unions may rely on the
Expedited Funds Availability Act (EFAA) and Regulation CC (12 CFR
part 229) to determine, for example, when a deposit is considered
made for purposes of dividend accrual, or when dividends need not be
paid on funds because a deposited check is later returned unpaid.
2. Ledger and collected balances. Credit unions may calculate
dividends by using a ``ledger'' balance or ``collected'' balance
method, as long as the crediting requirements of the EFAA are met
(12 CFR 229.14).
3. Withdrawal or principal. Credit unions must accrue dividends
on funds until the funds are withdrawn from the account. For
example, if a check is debited to an account on a Tuesday, the
credit union must accrue dividends on those funds through Monday.
Section 707.8--Advertising
(a) Misleading or Inaccurate Advertisements
1. General. All advertisements are subject to the rule against
misleading or inaccurate advertisements, even though the disclosure
applicable to various media differ. The word ``profit'' may be used
when referring to dividend-bearing share accounts, as it reflects
the nature of dividends. The word ``profit'' may not be used when
referring to interest-bearing deposit accounts.
2. Indoor signs. An indoor sign advertising an annual percentage
yield is not misleading or inaccurate if:
i. For a tiered-rate account, it also provides the upper and
lower dollar amounts of the tier corresponding to the advertised
annual percentage yield.
ii. For a term share account, it also provides the term required
to obtain the advertised annual percentage yield.
3. ``Free'' or ``no cost'' accounts. For purposes of determining
whether an account can be advertised as ``free'' or ``no cost,''
maintenance and activity fees include:
i. Any fee imposed if a minimum balance requirement is not met,
or if the member exceeds a specified number of transactions.
ii. Transaction and service fees that members reasonably expect
to be imposed on an account on a regular basis (see comments
4(b)(4)-1 and 2).
iii. A flat fee, such as a monthly service fee.
iv. Fees imposed to deposit, withdraw or transfer funds,
including per-check or per-transaction charges (for example, $.25
for each withdrawal, whether by check, in person).
4. Other fees. Examples of fees that are not maintenance or
activity fees include:
i. Fees that are not required to be disclosed under
Sec. 707.4(b)(4).
ii. Check printing fees of any type.
iii. Fees for obtaining copies of checks, whether or not the
original checks have been truncated or returned to the member
periodically.
iv. Balance inquiry fees.
v. Fees assessed against a dormant account.
vi. Fees for using an ATM.
vii. Fees for electronic transfer services that are not required
to obtain an account, such as preauthorized transfers or home
electronic credit union services.
viii. Stop payment fees and fees for share drafts or checks
returned unpaid.
5. Similar terms. An advertisement may not use a term such as
``fees waived'' if a maintenance or activity fee may be imposed
because it is similar to the terms ``free'' or ``no cost.''
6. Specific account services. Credit unions may advertise a
specific account service or feature as free as long as no fee is
imposed for that service or feature. For example, credit unions
offering an account that is free of deposit or withdrawal fees could
advertise that fact, as long as the advertisement does not mislead
members by implying that the account is free and that no other fee
(a monthly service fee, for example) may be charged.
7. Free for limited time. If an account (or a specific account
service) is free only for a limited period of time--for example, for
one year following the account opening--the account (or service) may
be advertised as free as long as the time period is stated.
8. Conditions not related to share accounts. Credit unions may
advertise accounts as ``free'' for members that meet conditions not
related to share accounts, such as the member's age. For example,
credit unions may advertise a share draft account as ``free for
persons over 65 years old,'' even though a maintenance or activity
fee may be assessed on accounts held by members that are 65 or
younger.
(b) Permissible Rates
1. Tiered-rate accounts. An advertisement for a tiered-rate
account that states an annual percentage yield must also state the
annual percentage yield for each tier, along with corresponding
minimum balance requirements. Any dividend rates stated must appear
in conjunction with the annual percentage yields for each tier.
2. Stepped-rate accounts. An advertisement that states a
dividend rate for a stepped-rate account must state all the dividend
rates and the time period that each rate is in effect.
3. Representative examples. An advertisement that states an
annual percentage yield for a type of account (such as a term share
account for a specified term) need not state the annual percentage
yield applicable to every variation offered by the credit union or
indicate that other maturity terms are available. In an
advertisement stating that rates for an account may vary depending
on the amount of the initial deposit or the term of a term share
account, credit unions need not list each balance level and term
offered. Instead, the advertisement may:
i. Provide a representative example of the annual percentage
yields offered, clearly described as such. For example, if a credit
union offers a $25 bonus on all term share accounts and the annual
percentage yield will vary depending on the term selected, the
credit union may provide a disclosure of the annual percentage yield
as follows: ``For example, our 6-month share certificate currently
pays a 3.15% annual percentage yield.''
ii. Indicate that various rates are available, such as by
stating short-term and longer-term maturities along with the
applicable annual percentage yields: ``We offer term share
certificates of deposit with annual percentage yields that depend on
the maturity you choose. For example, our one-month share
certificate earns a 2.75% APY. Or, earn a 5.25% APY for three-year
share certificate.''
(c) When Additional Disclosures are Required
1. Trigger terms. The following are examples of information
stated in advertisements that are not ``trigger'' terms:
i. ``One, three, and five year share certificates available''.
ii. ``Bonus rates available''.
iii. ``1% over our current rate,'' so long as the rates are not
determinable from the advertisement.
(c)(2) Time Annual Percentage Yield is Offered
1. Specified recent date. If an advertisement discloses an
annual percentage yield as of a specified date, that date must be
recent in relation to the publication or broadcast frequency of the
media used. For example, the printing date of a brochure printed
once for an account promotion that will be in effect for six months
would be considered ``recent,'' even though rates change during the
six-month period. Dividend rates published in a daily newspaper or
on television must be a rate offered shortly before (or on) the date
the rates are published or broadcast. Similarly, dividend rates
published in a daily newspaper or on television must be a rate
reflecting either the preceding dividend period, or a prospective
rate, and the option chosen should be noted.
2. Reference to date of publication. An advertisement may refer
to the annual percentage yield as being accurate as of the date of
publication, if the date is on the publication itself. For instance,
an advertisement in a periodical may state that a rate is ``current
through the date of this issue,'' if the periodical shows the date.
(c)(5) Effect of Fees
1. Scope. This requirement applies only to maintenance or
activity fees as described in paragraph 8(a).
(c)(6) Features of Term Share Accounts
(c)(6)(i) Time Requirements
1. Club accounts. If a club account has a maturity date, but the
term may vary depending on when the account is opened, credit unions
may use a phrase such as: ``The maturity date of this club account
is November 15; its term varies depending on when the account is
opened.''
(c)(6)(ii) Early Withdrawal Penalties
1. Discretionary penalties. Credit unions imposing early
withdrawal penalties on a case-by-case basis may disclose that they
``may'' (rather than ``will'') impose a penalty if that accurately
describes the account terms.
(d) Bonuses
1. General reference to ``bonus.'' General statements such as
``bonus checking'' or ``get a bonus when you open a checking
account'' do not trigger the bonus disclosures.
(e) Exemption for Certain Advertisements
(e)(1) Certain Media
(e)(1)(i)
1. ATM messages. Messages provided on ATM or computer screens
are eligible for this exemption.
(e)(1)(iii)
1. Tiered-rate accounts. Solicitations for tiered-rate accounts
made through telephone response machines must provide all annual
percentage yields and the balance requirements applicable to each
tier.
(e)(2) Indoor Signs
(e)(2)(i)
1. General. Indoor signs include advertisements displayed on
computer screens, banners, preprinted posters, and chalk or peg
boards. Any advertisement inside the premises that can be retained
by a member (such as a brochure or a printout from a computer) is
not an indoor sign.
2. Members outside the premises. Advertisements may be ``indoor
signs'' even though they may be viewed by members from outside. An
example is a banner in a credit union's glass-enclosed branch
office, that is located behind a teller facing members but is
readable by passersby.
(e)(3) Newsletters
1. General. The partial exemption applies to all credit union
newsletters, whether instituted before or after the compliance date
of part 707. Nor must a newsletter be of any particular circulation
frequency (e.g., weekly, monthly, quarterly, biannually, annually,
or irregularly) or of any certain format (e.g. magazine, bulletin,
broadside, circular, mimeograph, letter, or pamphlet) in order to be
eligible for the partial advertising exemption.
2. Permissible Distribution. In order for newsletters to retain
the partial advertising exemption, newsletters can be sent to
existing credit union members only. Any distribution reasonably
calculated to reach only members is also acceptable, such as:
i. Mailing newsletters to existing members.
ii. Distributing newsletters at a function reasonably limited to
members, such as an annual meeting or member picnic.
iii. Displaying or offering newsletters at a credit union lobby,
branch, or office.
3. Impermissible Distribution. Distributing a newsletter in a
place open to nonmembers, such as a sponsor's lunch room, is not
reasonably calculated to reach only members, and such newsletter
would be subject to all applicable advertising rules.
Section 707.9--Enforcement and Record Retention
(c) Record Retention
1. Evidence of required actions. Credit unions comply with the
regulation by demonstrating they have done the following:
i. Established and maintained procedures for paying dividends
and providing timely disclosures as required by the regulation, and
ii. Retained sample disclosures for each type account offered to
members, such as account-opening disclosures, copies of
advertisements, and change-in-term notices; and information
regarding the dividend rates and annual percentage yields offered.
2. Methods of retaining evidence. Credit unions must be able to
reconstruct the required disclosures or other actions. They need not
keep disclosures or other business records in hard copy. Records
evidencing compliance may be retained on microfilm, microfiche, or
by other methods that reproduce records accurately (including
computer files). Credit unions must retain copies of all printed
advertisements and the text of all advertisements conveyed by
electronic or broadcast media, and newsletters.
3. Payment of dividends. Credit unions must retain sufficient
rate and balance information to permit the verification of dividends
paid on an account, including the payment of dividends on the full
principal balance.
Appendix A to Part 707--Annual Percentage Yield Calculation
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
1. Rounding for calculations. The following are examples of
permissible rounding rules for calculating dividends and the annual
percentage yield:
i. The daily rate applied to a balance carried to five or more
decimals. For example; .008219178%, 3.00% for a 365 day year, would
be rounded to no less than .00822%.
ii. The daily dividends or interest earned carried to five or
more decimals. For example; $.08219178082, daily dividends on $1,000
at 3% for a 365 day year, would be rounded to no less than $.08219.
2. Exponents in a leap year. The annual percentage yield
formula's exponent numerator will remain 365 in leap years. The
``days in term'' figure used in the denominator should be consistent
with the length of term used in the dividends calculation.
3. First tier of a tiered-rate account. When credit unions use a
rate table, the first tier of a tiered rate account is to be
disclosed and advertised; ``Up to but not exceeding * * *'', ``$.01
to * * *'', or similar language.
4. Term Share Accounts Opened in Midterm. For club accounts that
meet the definition of a term share account, the annual percentage
yield is based on the maximum number of days in the term not to
exceed 365 days (or 366 days in a leap year).
Part II. Annual Percentage Yield Earned for Periodic Statements
1. Balance method. The dividend or interest figure used in the
calculation of the annual percentage yield earned may be derived
from the daily balance method or the average daily balance method.
Regardless of the dividend calculation method, the balance used in
the annual percentage yield earned formula is the average daily
balance. The average daily balance calculation is the sum of the
balances for each day in the period divided by the number of days in
the period. The balance for each day is based on a point in time;
i.e. beginning of day balance, end of day balance, closing of day
balance, etc. Each day's balance, for dividend accrual and payment
purposes, must be based on the same point in time and cannot be
based on the day's low balance.
2. Negative balances prohibited. Credit unions must treat a
negative account balance as zero to determine the balance on which
the annual percentage yield earned is calculated. (See commentary to
Sec. 707.7(a)(2).)
A. General Formula
1. Accrued but uncredited dividends. To calculate the annual
percentage yield earned, accrued but uncredited dividends:
i. May not be included in the balance for statements that are
issued at the same time or less frequently than the account's
compounding and crediting frequency. For example, if monthly
statements are sent for an account that compounds dividends daily
and credits dividends monthly, the balance may not be increased each
day to reflect the effect of daily compounding. Assume a credit
union will pay $13.70 in dividends on $100,000 for the first day,
$6.85 in dividends on $50,013.70 for the second day, and $3.43 in
dividends on $25,020.55 for the third day. The sum of each days
balance is $175,000 (does not include accrued, but uncredited,
dividends amounts $13.70, $6.85, and $3.43), thereby resulting in an
average daily balance for the three days of $58,333.33.
ii. Must be included in the balance for succeeding statements if
a statement is issued more frequently than compounded dividends is
credited on an account. For example, if monthly statements are sent
for an account that compounds dividends daily and credits dividends
quarterly, the balance for the second monthly statement would
include dividends that had accrued for the prior month. Assume a
credit union will pay $411.78 in dividends on 30 days of $100,000,
$427.28 in dividends on 31 days of $100,411.78, and $415.23 in
dividends on 30 days of $100,839.06. The balance (average daily
balance in the account for the period) for the second 31 days is
$100,411.78.
2. Rounding. The dividends earned figure used to calculate the
annual percentage yield earned must be rounded to two decimals to
reflect the amount actually paid. For example, if the dividends
earned for a statement period is $20.074 and the credit union pays
the member $20.07, the credit union must use $20.07 (not $20.074) to
calculate the annual percentage yield earned. For accounts that pay
dividends based on the daily balance method, compound and credit
dividends or interest quarterly, and send monthly statements, the
credit union may, but need not, round accrued dividends to two
decimals for calculating the ``projected'' or ``anticipated'' annual
percentage yield earned on the first two monthly statements issued
during the quarter. However, on the quarterly statement the
dividends earned figure must reflect the amount actually paid.
3. Compounding frequency using the average daily balance method.
Any compounding frequency, including daily compounding, can be used
when calculating dividends using the average daily balance method.
(See comment 707.7(b), which does not require credit unions to
compound or credit dividends at any particular frequency).
B. Special Formula for Use Where Periodic Statement is Sent More
Often Than the Period for Which Dividends are Compounded
1. Statements triggered by Regulation E. Credit unions may, but
need not, use this formula to calculate the annual percentage yield
earned for accounts that receive quarterly statements and that are
subject to Regulation E's rule calling for monthly statements when
an electronic fund transfer has occurred. They may do so even though
no monthly statement was issued during a specific quarter. This
formula must be used for accounts that compound and credit dividends
quarterly and that receive monthly statements, triggered by
Regulation E, which comply with the provisions of Sec. 707.6.
2. Days in compounding period. Credit unions using the special
annual percentage yield earned formula must use the actual number of
days in the compounding period.
Appendix B to Part 707--Model Clauses and Sample Forms
1. Modifications. Credit unions that modify the model clauses
will be deemed in compliance as long as they do not delete
information required by TISA or regulation or rearrange the format
so as to affect the substance or clarity of the disclosures.
2. Format. Credit unions may use inserts to a document (see
Sample Form B-11) or fill-in blanks (see Sample Forms B-4 and B-5,
which use double underlining to indicate terms that have been filled
in) to show current rates, fees or other terms.
3. Disclosures for opening accounts. The sample forms illustrate
the information that must be provided to a member when an account is
opened, as required by Sec. 707.4(a)(1). (See Sec. 707.4(a)(2),
which states the requirements for disclosing the annual percentage
yield, the dividend rate, and the maturity of a term share account
in responding to a member's request.)
4. Compliance with Regulation E. Credit unions may satisfy
certain requirements under Part 707 with disclosures that meet the
requirements of Regulation E. (See Sec. 707.3(c).) The model clauses
and sample forms do not give examples of disclosures that would be
covered by both this regulation and Regulation E (such as disclosing
the amount of a fee for ATM usage). Credit unions should consult
appendix A to Regulation E for appropriate model clauses.
5. Duplicate disclosures. If a requirement such as a minimum
balance applies to more than one account term (to obtain a bonus and
determine the annual percentage yield, for example), credit unions
need not repeat the requirement for each term, as long as it is
clear which terms the requirement applies to.
6. Guide to model clauses. In the model clauses, italicized
words indicate the type of disclosure a credit union should insert
in the space provided (for example, a credit union might insert
``March 25, 1995'' in the blank for ``(date)'' disclosure). Brackets
and diagonals (``/'') indicate a credit union must choose the
alternative that describes its practice (for example, [daily
balance/average daily balance]).
7. Sample forms. The sample forms (B-4 through B-11) serve a
purpose different from the model clauses. They illustrate various
ways of adapting the model clauses to specific accounts. The clauses
shown relate only to the specific transactions described.
By order of the National Credit Union Administration Board on
November 10, 1994.
Becky Baker,
Secretary of the Board.
[FR Doc. 94-28364 Filed 11-18-94; 8:45 am]
BILLING CODE 7535-01-M