December 9, 1997

James A. Caswell, Loan Manager
Oahu Education Employees Federal Credit Union
1226 College Walk
Honolulu, Hawaii 96817

Dear Mr. Caswell:

You have asked whether you must provide a disclosure regarding required deposits on share secured loans, when the interest rate on the existing share account is less than 5 percent. A disclosure is required under the facts described in your letter.

Regulation Z requires disclosure statements for certain lending transactions. 12 C.F.R. 226.17. "If the creditor requires the consumer to maintain a deposit as a condition of the specific transaction, a statement [is required] that the annual percentage rate does not reflect the effect of the required deposit." 12 C.F.R. 226.18(r). The Official Staff Interpretation of Regulation Z states that the following is not treated as a required deposit: "Requirement that a borrower be a customer or a member even if that involves a fee or a minimum balance." 12 C.F.R. pt. 226, Supp. I, §226.18, paragraph 18(r)(6). Your credit union requires a member to open a share account with a five dollar minimum balance; this is not classified as a required deposit under Regulation Z. However, if the credit union takes a security interest in the share account or does not permit the member to withdraw funds from the share account, the credit union is requiring the member to maintain the account as a condition of the loan and the disclosure is required.

NCUA has no official authority to interpret Regulation Z; that authority belongs to the Federal Reserve Board. We contacted an attorney at the Federal Reserve Board and confirmed our opinion that the disclosure is required under the circumstances described in your letter. Should you have any further questions on this issue, we suggest that you contact the Federal Reserve Board's consumer information service at (202) 452-3667.

Sincerely,

Sheila A. Allbin
Associate General Counsel

GC/MJMcK:bhs
SSIC 3501
97-0950