CUNA Comment Letter

Payment on Overdrawn Share Drafts

November 29, 1999

Ms. Becky Baker
Secretary to the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428

Via Facsimile 703-518-6319

Dear Ms. Baker:

The Credit Union National Association appreciates the opportunity to comment on NCUA's proposed regulation to allow federal credit unions to pay an overdrawn share draft without treating the overdraft as a loan. The proposal appeared in the Federal Register September 30, 1999. By way of background, CUNA represents more than 90% of our nation's over 11,000 state and federal credit unions.

Summary of CUNA's Position

CUNA strongly supports the authority of federal credit unions to honor overdrafts without having to treat such payments as member loans. However, the proposal as drafted would needlessly interject the agency into the operations and business decisions of federal credit unions regarding the payment of overdrafts. While we support NCUA's efforts to overturn its July 7, 1997 legal opinion letter (which declared that federal credit unions must treat overdraft payments as a loan), we do not agree that a regulation in this area is required. If NCUA determines a rule is necessary, we urge key changes be made that will allow a federal credit union to determine for itself what its overdraft policy should be.

CUNA's Concerns

A New Rule is Unnecessary

CUNA applauds the Board's efforts to move in the direction of permitting federal credit unions to honor a share draft written on a member's account that does not, at the time of presentment, have sufficient funds to cover the item. This practice has been common within the credit union system, and it was a surprise to many when NCUA's legal department determined that credit unions must treat the payment of an overdraft as an unsecured loan. The opinion meant that overdrafts could not be paid without a loan agreement and appropriate Regulation Z disclosures, a needless regulatory burden.

NCUA asserts that paying overdrafts without a loan agreement gives rise to safety and soundness concerns, as the credit union assumes greater risk with an overdraft than with a loan that has undergone a credit analysis. In our view, the risk associated with the occasional payment of an overdraft an as accommodation to a member is minimal, given the relatively small volume of overdrafts at most credit unions and the fact that overdraft amounts are collected from direct deposits in many cases. Thus, we do not believe the level of risk that might be associated with the payment of overdrafts necessitates a detailed regulation of the type NCUA is proposing. We think a better approach would be for NCUA to require federal credit unions to have a written policy on the subject of overdrafts and let each federal credit union determine what its policy should contain, based on the business judgment of its board.

If NCUA Proceeds with Its Rule, Changes Should be Made

If the agency determines that a new regulation is required, we urge the Board to make a number of modifications.

The proposal would require federal credit unions to set a cap on the total dollar amount of all overdrafts it will honor. We do not believe such an absolute restriction in the regulation, which will eliminate flexibility to address member needs, is appropriate. Credit unions should be permitted to address limitations in the context of the volume of overdrafts, circumstances of their membership and other legitimate business factors.

The proposal would require credit unions to establish a specific time frame of no more than 10 days to collect from the member or extend a loan to cover each overdraft. We believe this time frame is far too short. Credit unions should be able to determine this time frame on a case-by-case basis. In any event, we believe 90 calendar days is far more reasonable, more consistent with business practice and would afford credit unions and their members sufficient time to determine how best to handle the overdraft.

The proposal would direct credit unions to limit the number and dollar amount of overdrafts that will be permitted for each member. Again, credit unions must have flexibility to help their members. We believe a more reasonable approach would be to require a general limit that allows for some non-discriminatory deviation to address isolated situations.

Conclusion

Thank you for your consideration of our views on this important issue. We believe NCUA has taken a positive step, but that federal credit unions and their members would be better served if the agency were less rigid in its regulatory approach to the subject of overdrafts. If you have any questions about our comments, please do not hesitate to give me or Assistant General Counsel Jeffrey Bloch a call at 202-682-4200.

Sincerely,

Mary Mitchell Dunn
Associate General Counsel