[Federal Register Volume 65, Number 56 (Wednesday, March 22, 2000)]
[Rules and Regulations]
[Pages 15224-15226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7039]


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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: Final rule.

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SUMMARY: NCUA is amending 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. The change will enable 
credit unions to offer this service without subjecting credit unions to 
undue risk.

DATES: This rule is effective July 1, 2000.

ADDRESSES: National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.

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 
that will result in an overdrawn account. NCUA's longstanding position 
has been that an overdraft, as a financial accommodation to a member, 
constitutes a loan or line of credit to a member.
    A number of FCUs and trade associations contended that FCUs are at 
a competitive disadvantage because they are unable to cover a member's 
overdraft absent a prearranged, written agreement for the extension of 
credit. The NCUA Board believed this argument had merit although there 
might be some safety and soundness concerns with extending credit to a 
member without a written lending agreement. Therefore, on September 16, 
1999, the NCUA Board issued a proposed amendment to its general lending 
regulation with a sixty-day comment period (64 FR 52694 September 30, 
1999).
    The proposed amendment to section 701.21(c)(3) provided that a 
credit union could advance money to a member to cover his or her 
account deficit without having a credit application on file if the 
credit union had a written overdraft policy. Specifically, the NCUA 
Board proposed that a credit union's written

[[Page 15225]]

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.

B. Comments

    The comment period ended on November 29, 1999. Twenty-four comments 
were received. Comments were received from fourteen federal credit 
unions, eight state leagues, and two national credit union trade 
associations. The commenters were generally supportive of permitting 
payment of overdrafts without credit applications on file, but most 
commenters suggested modifications.
    Two commenters completely supported NCUA's proposal. Five 
commenters generally supported the proposal. Eight commenters supported 
requiring credit unions to have overdraft policies; however, seven of 
these eight commenters opposed NCUA mandating what should be included 
in the overdraft policy. Seven of the twenty-four commenters stated 
that an overdraft is not a loan and this regulation is unnecessary. 
These commenters believe that credit unions have the ability to engage 
in this activity without regulatory authorization. The NCUA Board 
disagrees. The NCUA Board believes an overdraft is a loan, and, in 
order for a federal credit union to advance funds to cover an overdraft 
without first having a written application in place as required by 
NCUA's lending regulation, a regulatory change is in order. The NCUA 
Board also continues to believe that a written overdraft policy will 
offset safety and soundness concerns and prevent insider abuses.
    We received comment on the following issues:

Should the policy address how the credit union will honor overdrafts?

    One commenter requested clarification on what NCUA is seeking to 
cover with this requirement. After further review, the NCUA Board 
believes stating how the overdraft is covered is superfluous because of 
the other specific items the policy must address. The NCUA Board has 
deleted this requirement from the final amendment.

Should the policy set a cap on the total dollar amount of all 
overdrafts the credit union will honor?

    Two commenters approved of setting a dollar cap in the policy. 
Three commenters opposed setting such a limit. Eight commenters stated 
that the written policy should address this issue, but that NCUA should 
not establish the limit. The NCUA Board did not suggest a specific 
dollar cap in the proposal. The NCUA Board has decided that the policy 
must set a cap and the credit union should establish the dollar amount.

Should the overdraft policy 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?

    Two commenters supported the ten-day time limit. Eight commenters 
stated that the credit union, not NCUA, should establish the time limit 
for the member to either deposit funds or obtain an approved loan from 
the credit union. Three commenters suggested a 30-day time limit and 
two commenters suggested a 90-day time limit. Three commenters 
suggested other time limits. The NCUA Board believes that a time limit 
is necessary for safety and soundness reasons. A ten-day time limit may 
not be sufficient for the member in all cases; therefore, the rule 
provides that a credit union's policy must establish a time limit, not 
to exceed forty-five days. This should be sufficient time for any 
prudent individual to cover the overdraft or apply for a loan.
    One commenter asked whether the time limit begins to run at the 
time the credit union advances the overdraft protection to cover the 
member's account deficit or from the date the member receives notice of 
the overdraft. The time limit starts to run the day the credit union 
advances the overdraft protection.

Should the overdraft policy require a credit union to write off any 
overdraft for which the member has not either repaid the credit union 
or obtained an approved loan?

    One commenter stated that NCUA should set a time limit after which 
the credit union must write off the loan. One commenter suggested 30 
days. Eight commenters stated that the credit union, not NCUA, should 
set the time limit to write off the loan. The NCUA Board did not 
propose to establish when a credit union needs to write off an 
overdraft for which the member has not either repaid the credit union 
or obtained an approved loan. In the final rule, to maintain maximum 
flexibility for credit unions, the NCUA Board is not setting a time 
limit. Each credit union should establish its own requirement for when 
it will write off an overdraft consistent with its lending policies.

Should the policy limit the number and dollar amount of overdrafts the 
credit union will honor per member?

    Four commenters stated that the credit union, not NCUA, should 
establish this limit in the policy. One commenter stated that a credit 
union's management, not the board of directors, should set the limit on 
the dollar amount of overdrafts the credit union will honor per member. 
Three commenters would eliminate a limit on the number of overdrafts 
the credit union will honor per member. These commenters believe that 
the number of overdrafts have no bearing on risk and the reference to 
the ``number of overdrafts'' should be removed from the rule. These 
commenters would also go farther and eliminate the limit on the dollar 
amount per member from the written overdraft policy.
    In the proposal, the NCUA Board did not establish a number and 
dollar limit but rather proposed that each credit union should 
establish its own limit. However, the NCUA Board agrees with those 
commenters who stated that the number of overdrafts a member incurs may 
have no bearing on risk. The NCUA Board continues to believe that the 
dollar amount per member does raise significant safety and soundness 
concerns. Therefore, the final rule simply requires that the credit 
union's own policy set forth the dollar amount of overdrafts the credit 
union will honor per member. As in the proposed rule, to provide 
maximum flexibility to credit unions, it is up to the credit union, not 
NCUA, to establish this dollar amount. This dollar amount should be 
consistent with the credit union's ability to absorb losses and manage 
risk.

Should the policy establish the fee and interest rate, if any, the 
credit union will charge members for honoring overdrafts?

    One commenter stated the policy itself need not contain the amount 
of the overdraft fee and interest rate, but simply should require that 
such fee and interest rate be established and disclosed. The NCUA Board 
continues to believe that, if a credit union is going to engage in this 
activity, the fee and interest rate, if any, should be set forth in the 
policy. The NCUA Board believes this is a matter of prudent internal 
control and sound judgment.

[[Page 15226]]

Should the rule impose additional restrictions on overdrafts by credit 
union employees or officials?

    Eight commenters opposed any additional restrictions. These 
commenters believe that additional regulatory restrictions are not 
necessary. Two commenters would impose additional restrictions on 
overdrafts by credit union employees or officials but provided no 
persuasive rationale on why the rule should treat them differently than 
other credit union members. NCUA's regulations on loans to officials 
and nonpreferential treatment provide sufficient regulatory protection 
against any impropriety or appearance of impropriety. See 12 CFR 
701.21(d).

C. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any final regulation may 
have on a substantial number of small entities (primarily those under 
$1 million in assets). For purposes of this analysis, credit unions 
under $1 million in assets will be considered small entities. As of 
June 30, 1999, there were 1,690 such entities with a total of $807.3 
million in assets, with an average asset size of $0.5 million. These 
small entities make up 15.6 percent of all credit unions, but only 0.2 
percent of all credit union assets.
    The final amendment permits 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. The NCUA Board does not believe that the final 
amendment will impose reporting or recordkeeping burdens that require 
specialized professional skills not available to them.
    The NCUA Board has determined and certifies that this final 
amendment, if adopted, will not have a significant economic impact on a 
substantial number of small credit unions.

Paperwork Reduction Act

    The reporting requirements in section 701.21(c)(3) have been 
submitted to and approved by the Office of Management and Budget under 
OMB control number 3133-0139. Under the Paperwork Reduction Act of 
1995, no persons are required to respond to a collection of information 
unless it displays a valid OMB number. The control number is displayed 
in the table at 12 CFR part 795.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory action on state and local 
interests. NCUA, an independent regulatory agency as defined in 44 
U.S.C 3502(5), voluntarily adheres to the fundamental federalism 
principles addressed by the executive order. This final amendment will 
only apply to federal credit unions. This final rule makes no changes 
with respect to state credit unions and therefore, will not impact 
state and local interests.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedures Act. 5 U.S.C. 551. The Office of Management and Budget has 
determined that this is not a major rule.

D. Agency Regulatory Goal

    NCUA's goal is clear, understandable regulations that impose a 
minimal regulatory burden. We requested comments on whether the 
proposed amendment were understandable and minimally intrusive if 
implemented as proposed. We received no specific comment on this issue.

List of Subjects in 12 CFR Part 701

    Credit, Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on March 16, 
2000.
Becky Baker,
Secretary of the Board.

    For the reasons set forth in the preamble, the National Credit 
Union Administration is amending 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

    1. The authority citation 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: 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 forty-five calendar days 
for a member either to deposit funds or obtain an approved loan from 
the credit union to cover each overdraft; limit the 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. 00-7039 Filed 3-21-00; 8:45 am]
BILLING CODE 7535-01-U