NCUA Issues Guidance for Overdrafts, Urges Member Education on Less Costly Alternatives
ALEXANDRIA, Va.-NCUA is speaking out about the risks and benefits of overdraft programs in a new Letter to Credit Unions (05-CU-21). The agency warned, "In coming months, NCUA examiners will look closely at courtesy pay programs." A copy of the related examination questionnaire was included with the letter from NCUA Chairman JoAnn Johnson. "Unlike traditional lines of credit, non-contractual overdrafts do not require individual underwriting or written agreements. This service, which is often referred to as bounce protection or courtesy pay, charges members a per item fee for honoring drafts or other transactions that overdraw a share account," the letter read. `The risks and benefits associated with non-contractual overdrafts (courtesy pay) should be carefully evaluated by a credit union before offering the service. While courtesy pay may assist infrequent users in avoiding the inconvenience and merchant fees associated with returned checks, repeat use of courtesy pay can result in high aggregate fees that negatively impact a member's financial position." As of July 1, 2006, in accordance with an interim regulation approved at the November NCUA Board meeting, credit unions will have to comply with Part 707, the regulation covering the Truth in Savings Act, regarding additional disclosures. "Credit unions offering courtesy pay to members must provide clear and conspicuous disclosures about the cost of this service," according to the letter. "In addition, to promote thrift and fiscal responsibility, credit unions should educate members about program details and less expensive options." Federal credit unions must require that overdrafts be repaid in 45 days under NCUA's Section 701.21, but if it is converted to an underwritten loan to extend the repayment period, the loan must comply with the disclosure requirements of Regulation Z. "State law may impose other requirements for prompt collection on federally insured state credit unions," NCUA's letter explained.