Permissibility of a Share Overdraft Program

Steve Schott, Chief Financial Officer
Security Service Federal Credit Union
7323 Highway 90 West
San Antonio, Texas 78227

Re: Permissibility of a Share Overdraft Program.

Dear Mr. Schott:

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 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).