[Federal Register Volume 64, Number 189 (Thursday, September 30, 1999)]
[Proposed Rules]
[Pages 52694-52695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25397]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
Organization and Operations of Federal Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
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SUMMARY: NCUA is proposing to amend its lending regulation to permit
federal credit unions to advance money to members to cover account
deficits without having a credit application from the member on file if
the credit union has a written overdraft policy.
DATES: The NCUA must receive comments on or before November 29, 1999.
ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail
or hand-deliver comments to: National Credit Union Administration, 1775
Duke Street, Alexandria, Virginia 22314-3428, or you may fax comments
to (703) 518-6319. Please send comments by one method only.
FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Senior Staff
Attorney, or Regina M. Metz, Staff Attorney, in the Division of
Operations, Office of General Counsel, at the above address or
telephone: (703) 518-6540.
SUPPLEMENTARY INFORMATION:
A. Background
The Federal Credit Union Act does not specifically address a
federal credit union's (FCU's) authority to pay or honor a share draft
written that will result in an overdrawn account. NCUA's longstanding
position has been that an FCU's payment of an overdraft as a financial
accommodation to a member constitutes a loan or line of credit to a
member.
When an FCU pays a member's overdraft, the FCU uses its money to
pay a member's third party obligations. The overdraft is a debt that
the FCU expects the member to repay. Because the FCU is making a loan,
it must comply with the NCUA's lending regulation requiring a credit
application to be on file for each borrower supporting the decision to
make a loan or establish a line of credit. 12 CFR 701.21(c)(3).
A number of federal credit unions and trade associations contend
that federal credit unions are at a competitive disadvantage because
they are unable to cover a member's overdrafts absent a prearranged,
written agreement for the extension of credit. The NCUA Board believes
this argument has merit although there may be some safety and soundness
concerns with extending credit to a member without a written lending
agreement. Overdrafts which are unsupported by an agreement and for
which there is no credit analysis represent an unsecured obligation of
the member to the credit union. In general, a credit union undertakes a
greater level of risk with this activity than with a loan which has
undergone a thorough credit analysis. However, after careful review,
the NCUA Board is proposing to amend Sec. 701.21(c)(3) to permit a
credit union to advance money to a member to cover his or her account
deficit without having a credit application from the borrower on file
if the credit union has a written overdraft policy. The NCUA Board
believes that a written overdraft policy will offset safety and
soundness concerns and prevent insider abuses. The Board is proposing
that a credit union's written overdraft policy must: (1) Address how
the credit union will honor overdrafts; (2) set a cap on the total
dollar amount of all overdrafts the credit union will honor; (3)
establish a time limit not to exceed ten business days for a member
either to deposit funds or obtain an approved loan from the credit
union to cover each overdraft; (4) limit the number and dollar amount
of overdrafts the credit union will honor per member; and (5) establish
the fee and interest rate, if any, the credit union will charge members
for honoring overdrafts.
The NCUA Board requests comments from the public on whether the
regulation should impose additional restrictions on overdrafts by
credit union employees or officials. The NCUA Board also requests
comments on whether NCUA should set limits on the total dollar amount a
credit union can lend to honor overdrafts as well as the total dollar
amount per member. The NCUA Board is also requesting comments on
whether the regulation should require a federal credit union to have in
its overdraft policy a certain number of days after which it will write
off any overdraft for which the member has not either repaid the credit
union or obtained an approved loan. Finally, the NCUA Board requests
comments on whether the ten-day requirement for the member to cover the
overdraft is appropriate. The risk of nonpayment of an overdraft that
is not covered by the member within such a time period increases
dramatically.
While the proposed regulation is under consideration, the NCUA
intends to continue its current supervisory approach to overdrafts that
are paid as
[[Page 52695]]
an accommodation to members. The approach has been that it will not
take exception to FCUs that permit overdrafts as long as there are no
safety and soundness concerns or evidence that the practice is being
abused or otherwise used as a means of circumventing other regulatory
requirements or giving preferential treatment to insiders.
Finally, in proposing this rule, NCUA is not directing or
encouraging credit unions to replace using written overdraft agreements
with members with a written overdraft policy. In fact, because written
overdraft agreements function essentially as a lending agreement that
becomes operational in the event of an overdraft, they are a preferable
way of addressing the safety and soundness concerns presented by
overdrafts.
B. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact any proposed regulation may
have on a substantial number of small entities (primarily those under
$1 million in assets). The NCUA has determined and certifies that this
proposed rule, if adopted, will not have a significant economic impact
on a substantial number of small credit unions. Accordingly, the NCUA
has determined that a Regulatory Flexibility Analysis is not required.
Paperwork Reduction Act
The NCUA Board has determined that the proposed notice and
disclosure requirements in Sec. 701.21 constitute a collection of
information under the Paperwork Reduction Act. NCUA is submitting a
copy of this proposed rule to the Office of Management and Budget (OMB)
for its review.
The proposed rule requires a federal credit union that advances
money to a member to cover his or her account deficit without having
the member's credit application on file to have a written overdraft
policy. The policy must: (1) Address how the credit union will honor
overdrafts; (2) set a cap on the total dollar amount of all overdrafts
the credit union will cover; (3) establish time limits for a member to
deposit funds to cover each overdraft; (4) limit the number and dollar
amount of overdrafts the credit union will honor per member; and (5)
establish the fee and interest rate, if any, the credit union will
charge members for covering overdrafts.
The written policy requirement is necessary to insure safety and
soundness in the credit union industry and protect the interests of
credit union members where a federal credit union provides overdraft
protection to a member without having his or her credit application on
file.
The NCUA Board estimates that it will take an average of four hours
to comply with this written policy requirement. The NCUA Board also
estimates that 1000 federal credit unions will write overdraft policies
so the total annual collection burden is estimated to be approximately
4000 hours.
The Paperwork Reduction Act of 1995 and OMB regulations require
that the public be provided an opportunity to comment on information
collection requirements, including an agency's estimate of the burden
of the collection of information. The NCUA Board invites comment on:
(1) Whether the collection of information is necessary; (2) the
accuracy of NCUA's estimate of the burden of collecting the
information; (3) ways to enhance the quality, utility, and clarity of
the information to be collected; and (4) ways to minimize the burden of
collection of information. Comments should be sent to: OMB Reports
Management Branch, New Executive Office Building, Room 10202,
Washington, D.C. 20503; Attention: Alex T. Hunt, Desk Officer for NCUA.
Please send NCUA a copy of any comments you submit to OMB.
Executive Order 12612
Executive Order 12612 requires NCUA to consider the effect of its
actions on state interests. This proposed rule makes no significant
changes with respect to state credit unions and therefore, will not
materially affect state interest.
C. Agency Regulatory Goal
NCUA's goal is clear, understandable regulations that impose a
minimal regulatory burden. We request your comments on whether the
proposed amendment is understandable and minimally intrusive if
implemented as proposed.
List of Subjects in 12 CFR Part 701
Credit, Credit unions, Reporting and recordkeeping requirements
By the National Credit Union Administration Board on September
16, 1999.
Becky Baker,
Secretary of the Board.
For the reasons set forth in the preamble, the National Credit
Union Administration proposes to amend 12 CFR part 701 as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
1. The authority citation for part 701 continues to read as
follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, and 1789.
Section 701.6 is also authorized by 15 U.S.C. 3717.
Section 701.31 is also authorized by 15 U.S.C. 1601 et seq.; 42
U.S.C. 1981 and 3601-3610.
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
2. Amend Sec. 701.21 by revising paragraph (c)(3) to read as
follows:
Sec. 701.21 Loans to members and lines of credit to members.
* * * * *
(c) * * *
(3) Credit applications and overdrafts. Consistent with policies
established by the board of directors, the credit committee or loan
officer shall ensure that a credit application is kept on file for each
borrower supporting the decision to make a loan or establish a line of
credit. A credit union may advance money to a member to cover an
account deficit without having a credit application from the borrower
on file if the credit union has a written overdraft policy. The policy
must: address how the credit union will honor overdrafts; set a cap on
the total dollar amount of all overdrafts the credit union will honor
consistent with the credit union's ability to absorb losses; establish
a time limit not to exceed ten business days for a member either to
deposit funds or obtain an approved loan from the credit union to cover
each overdraft; limit the number and dollar amount of overdrafts the
credit union will honor per member; and establish the fee and interest
rate, if any, the credit union will charge members for honoring
overdrafts.
* * * * *
[FR Doc. 99-25397 Filed 9-29-99; 8:45 am]
BILLING CODE 7535-01-U