CUNA Regulatory Comment Call

December 13, 2005

EXECUTIVE SUMMARY

• The National Credit Union Administration (NCUA) has issued an interim final rule amending the rules that implement the Truth in Savings Act (TISA), which includes official staff interpretations that interprets the new requirements. These changes are intended to improve the uniformity and adequacy of information provided to members when they overdraft their accounts. They specifically address overdraft privilege plans in which credit unions pay checks and allow other transactions when there are insufficient funds in the account.
• The rule includes the following changes:
  • Requires additional disclosures about fees and other terms for overdraft privilege programs, including disclosures in advertisements.
  • Credit unions promoting the payment of overdrafts in advertisements will also be required to disclose on periodic statements the total dollar amount imposed for overdraft fees and the total imposed for returned-item fees, both for the statement period and for the year-to-date.
  • Expands the current rule’s prohibition against misleading advertisements for new accounts to now cover communications with current members about their existing accounts.

• The rule will be effective as of December 8, 2005, although compliance will not be required until July 1, 2006. Credit unions may submit comments on the rule, which must be received by February 6, 2006.
• Please submit comments to CUNA by February 1, 2006.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Associate General Counsel Mary Dunn at mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the proposed changes, or you may access them here.

BACKGROUND

TISA requires financial institutions to disclose yields, fees, and other terms concerning deposit accounts to consumers at account opening, upon request, when changes in terms occur, and on periodic statements. There are also rules prohibiting advertisements that are misleading or inaccurate. The Federal Reserve Board’s (Fed’s) Regulation DD implements TISA, which includes official staff commentary that interprets the regulation and provides guidance in applying the regulation to specific transactions. Credit unions are covered under substantially similar rules that are issued by the National Credit Union Administration.

DESCRIPTION OF THE INTERIM FINAL RULE

Periodic Statements

For credit unions that promote the payment of overdrafts in advertisements, the rule will now require that they must separately disclose on their periodic statements the total amount of fees and charges imposed for paying overdrafts, as well as the total amount of fees charged for returning items unpaid. These totals must be provided for both the statement period and for the calendar year-to-date for any account in which the advertisement applies.

Also, fees for paying overdrafts and fees for returning items unpaid may not be grouped together as fees for insufficient funds. In addition to the per item fee, the term “fees” also includes interest charges, any other periodic fee, and fees charged for maintaining an account in an overdraft status. Credit unions may indicate in a current statement that fees for a prior period were waived, but that must not affect the total for the current statement period. The credit union may reflect the adjustment in the year-to-date total.

This new requirement will not apply to credit unions that do not promote the payment of overdrafts and will not apply to credit unions that promote a service of transferring funds from another account in order to avoid an overdraft. The official staff interpretations provide examples of when a credit union is promoting the payments of overdrafts in an advertisement. In addition to print, broadcast, telephone, or electronic advertisements and promotions, other specific examples include indicating the overdraft limit for an account on a periodic statement, stating on an automated teller machine (ATM) receipt or screen the account balance that includes available overdraft funds, and indicating this information on automated systems, such as a telephone response system or on the Internet website.

A credit union that does not otherwise promote the payment of overdrafts would not trigger this requirement solely by conducting the following activities:

• Communicating information about the payment of overdrafts in response to a member-initiated inquiry about overdrafts or share accounts in general. However, this does not include providing information about the payment of overdrafts in response to a balance inquiry made through an automated system, such as a telephone-response system, an ATM, or an Internet website as these activities would trigger these periodic statement disclosure requirements.
• Providing educational materials that do not specifically describe the credit union’s overdraft service.
• Promoting in an advertisement a traditional line of credit that is subject to the Truth in Lending Act, Regulation Z.
• Engaging in an in-person discussion with the member.
• Making disclosures required by federal or applicable law. However, this would not include promotional materials that are included with these disclosures.
• Providing a notice or including information on a periodic statement informing the member about a specific overdrawn item or the amount the account is overdrawn.
• Including in an account agreement information about the credit union’s right to pay overdrafts.
• Notifying a member that completing a requested transaction, such as an ATM withdrawal, may trigger an overdraft fee or providing a general notice that items overdrawing an account may trigger an overdraft fee.

These disclosures must be made beginning on the first statement period that begins after the credit union advertises the payment of overdrafts. Credit unions may disclose total fees imposed for the calendar year either since the beginning of the year or since the beginning of the first statement period for that year in which such disclosures were required. These disclosure requirements will no longer apply to an account after at least two years have passed since the last advertisement was made that promoted this account.

A credit union that acquires an account must provide the disclosures on the first statement period after the acquiring credit union promotes the payment of overdrafts for that account. These disclosures do not have to be provided if the acquiring credit union does not promote overdrafts, even if the previous institution promoted the service.

Account-opening Disclosures

TISA requires the disclosure of any fee that may be imposed in connection with the account and the conditions in which it may be imposed. Under the final rule, credit unions must now specify in their TISA account-opening disclosures the categories of transactions for which an overdraft fee may be imposed. This requirement will apply to all credit unions, not just those that promote the payment of overdrafts in an advertisement, as is the case for the requirements for periodic statements, as described above.

This description does not have to be an exhaustive list. Model language is included in which the credit union may simply state that the fee is imposed for overdrafts “created by checks, in-person withdrawals, ATM withdrawals, or by other electronic means,” as applicable. However, describing the fee as a fee for “overdrafts items” will not be sufficient as this would not describe whether it would apply only to share drafts or whether it applies to other transactions, such as ATM withdrawals or other types of electronic transactions.

Advertising Rules

Credit unions that promote the payment of overdrafts will be required to include the following disclosures in their advertisements about this service.

• The applicable fee or charge.
• The categories of transactions that are covered. The model language described above for account-opening disclosures may be used.
• The time period that members have to repay or cover the overdraft. If a credit union reserves the right to require repayment immediately or on demand, instead of providing a specific time period for repayment, the credit union may comply with this requirement by disclosing this information.
• The circumstances in which the credit union would not pay an overdraft. The official staff interpretation provides the following model language that may be used: “Whether your overdrafts will be paid is discretionary and we reserve the right not to pay. For example, we typically do not pay overdrafts if your account is not in good standing, or you are not making regular deposits, or you have too many overdrafts.”

Stating the available overdraft limit or the amount of funds available on a periodic statement would be considered an advertisement that would trigger the required disclosures. The rule provides exceptions to these requirements, similar to those described above for periodic statement disclosures. For example, the advertising disclosure requirements will not apply when providing educational materials, responding to member-initiated inquiries about overdrafts or deposit accounts, or notifying a member about a specific overdraft in their account.

These advertising disclosures are also not required on ATM receipts or for advertisements using broadcast media, such as television or radio, or outdoor media, such as billboards. These exceptions do not apply to advertisements on Internet websites, ATM screens, advertisements on telephone response systems, or those sent by e-mail. However, the specific disclosures described above regarding the categories of transactions covered and the circumstances in which the credit union will not pay an overdraft will not be required for advertisements made on an ATM screen or by use of a telephone response machines. These disclosure requirements also do not apply to advertisements for signs inside the credit union, except these signs must indicate that fees may apply and that the member should contact an employee for further information about fees and terms. Although methods of advertisements described in this paragraph provide exceptions from disclosure requirements, credit unions that advertise in this manner will still be required to comply with the periodic statement disclosure requirements, as described above.

Prohibiting Misleading Advertisements

The rule will expand TISA’s prohibition against advertisements, announcements, or solicitations for new accounts that are misleading or misrepresent the deposit contract to now include communications with current members about the terms of their existing accounts. The following are examples of misleading advertisements:

• Representing an overdraft service as a “line of credit.”
• Representing that the credit union will honor all checks or transactions, when the credit union has discretion to not honor a transaction.
• Representing that members with an overdrawn account are allowed to maintain a negative balance when the terms of the overdraft service require the member to promptly return the account to a positive balance.
• Describing the overdraft service solely as protection against bounced share drafts when the credit union also permits overdrafts in connection with ATM withdrawals or other electronic fund transfers.
• Describing the account as “free” or “no cost” in an advertisement that also promotes a service in which there is a fee, such as an overdraft service, unless the advertisement for the account clearly indicates that there is a cost for this service. Advertisements for the overdraft program itself must disclose the amount of the fee, as well as the other required information.

• Will you have enough time to implement the necessary operational changes before July 1, 2006? If not, how much additional time will you need?
  
  

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• This rule is substantially similar to the Fed’s rule that was issued earlier this year. Are there credit union specific issues that NCUA needs to address in this rule?
  
  

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• Do you agree that returned item fees should be disclosed on periodic statements, along with the overdraft fee?
  
  

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• Other comments?
  
  

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