November 9, 1998
Steve Schott, Chief Financial Officer
Security Service Federal Credit Union
7323 Highway 90 West
San Antonio, Texas 78227
The National Credit Union Administration's (NCUA) Region V Office
has raised concerns about Security Service Federal Credit Union's
(Security Service) overdraft protection program. The Region believes
that Security Service's overdraft program is impermissible and
has submitted a copy of the credit union's brochure explaining
the program to our office for review. We conclude that Security
Service's overdraft program is impermissible.
When a share draft is presented that will overdraw an account,
a federal credit union (FCU) can: (1) return the draft for lack
of sufficient funds; (2) accept the draft provided the member
deposits sufficient funds to cover the overdraft before the time
limits imposed for returning a draft expire; (3) accept the draft
and clear the overdraft by transferring funds from another account;
or (4) accept the draft and clear the overdraft by an advance
of funds from a line of credit special loan plan or other agreement
established with the member that complies with §701.21(c)
of NCUA's regulations. See NCUA Accounting Manual §6150.7
(attached).
Security Service's overdraft protection program provides that
when a share draft is presented that will overdraw a member's
account, the credit union will accept the draft and clear the
overdraft by an advance of up to $300. A member does not have
to apply for this overdraft protection. All checking accounts
used for personal and household purposes, opened for at least
90 days and in good standing, are automatically granted the overdraft
protection. Once the credit union pays the share draft, a member
has 30 days to bring the account to a positive balance. If the
member is unable to do so within 45 days, the credit union will
then offer the member a "Fresh Start Loan" that allows
the member to repay the overdraft in monthly installments.
Neither the Federal Credit Union Act nor NCUA's regulations specifically
address an FCU's authority to pay a share draft that will overdraw
an account. However, our view is that payment of an overdraft
is, in effect, a loan or line of credit to a member. As discussed
in our July 7, 1997, letter to William J. Smetana, a copy
Steve Schott, Chief Financial Officer
Page Two
of which is attached, an FCU must have some type of loan agreement
in existence between it and the member and must have complied
with the lending requirements in §701.21(c) of NCUA's regulations
Security Service's overdraft program is impermissible because
it advances up to $300 to a member to cover an account deficit
without having a loan agreement in existence between it and a
member. Accordingly, Security Service should redesign its overdraft
protection program to comply with the lending requirements of
§701.21(c).
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/NSW:bhs
SSIC 3000
98-0721
cc: Phillip R. Crider, Region V