In split decision, NCUA board rejects overdraft proposal

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In a split decision, the National Credit Union Administration board on Thursday rejected a measure that would have permitted federal credit unions to keep overdrafts open on their books longer than the current 45-day limit.

NCUA Chairman Rodney Hood was the only member of the three-person panel who argued in favor of the proposal. The interim final rule would have replaced the current limit with a more general requirement that individual FCUs “establish a time limit that is both reasonable and applicable to all members.”

The existing 45-day rule, which has been in place since 2000, is “overly prescriptive,” according to Hood. “Credit unions are in the best position to know how to serve their members,” he said.

A staff report outlining the reasons for adjusting the overdraft time limit cited concerns that it limited credit unions “from taking appropriate steps to provide their members the flexibility needed to cope with the impact of COVID-19.”

“This is a problem now,” Hood said, echoing the report’s conclusion. “More people are having to deal with overdrafts. They don’t need to be pounded on for repayment on day 43 or day 44.”

But board member Todd Harper, who has called repeatedly for stronger consumer protection requirement for credit unions, said the proposal “missed a tremendous opportunity to provide substantive and real relief” by ignoring overdraft fees.

Rather than simply extending the overdraft time limit, Harper said, the agency should take “bold action” to help struggling credit union members. “We need to be doing more to protect households from [the coronavirus pandemic’s] escalating economic fallout by eliminating or capping fees.”

Overdraft fees “impose a great burden on struggling families who live paycheck to paycheck,” Harper added.

Board member J. Mark McWatters cast the deciding “no” vote, but his opposition different from Harper’s. McWatters was silent about fees. He objected to presenting the proposal as an interim final rule with immediate effect, instead of a proposed rule with a 30-day comment period.

While the interim final process does allow for a comment period, “receiving comments after a rule becomes final is of limited benefit,” McWatters said.

“I can’t support adoption of the overdraft policy as an interim final rule,” McWatters said. “Delaying it for 30 days so [the public] can comment is the right thing to do.”

NCUA officials said they couldn’t recall the last time an item brought before the board didn’t pass — a fact the chairman noted.

“While it is rare for an open board meeting to include an item that does not pass, it does occasionally happen,” Hood said. “If I only bring forth ideas to the board that we know we have the votes for, it does not allow for an honest, open and full debate. I brought this issue forth because I believe it is important. And the public has a right to transparency on this matter.”

Hood added that he may well ask the board to reconsider the issue.

“The Office of the General Counsel determined that today’s rule was appropriate as an interim final rule and did not violate the Administrative Procedure Act,” he said in a press release following Thursday’s board meeting. “Therefore, I reserve my right as chairman to have the board reconsider this rule if the public thinks this is important.”

In another sign of how widespread the pandemic’s impact is likely to be, the agency’s Acting Chief Financial Officer Eugene Schied told the board the National Credit Union Share Insurance Fund had increased its credit reserves by 51%, from $117 million to $177 million as a hedge against potential failures.

Hood noted the share insurance fund “is on pretty solid footing,” currently, with just 0.77% of the industry’s assets held by credit unions with a CAMELS rating of 4 or 5. Still, it was clear Hood and other board members are concerned today’s relatively rosy scenario is likely to take a turn for the worse.

“We can’t make the mistake of saying just because something looks good today that it’s going to stay that way tomorrow or the day after,” McWatters said.

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While the board rejected the interim final overdraft rule, it gave unanimous consent to another interim final rule that streamlines the net-worth restoration process for credit unions classified as undercapitalized due to share growth, as opposed to credit quality issues or other operational problems. Under the interim final rule NCUA adopted Thursday, credit unions experiencing a surge in deposits would have to attest that its reduction in capital was a temporary condition caused by the coronavirus crisis.

The rule change sunsets Dec. 31, 2020.

The capital rule applies to all federally insured credit unions. Lucy Ito, president and CEO of the National Association of State Credit Union Supervisors, said she saw the need for a change. Ito also pointed out NCUA acted without consulting state regulators.

“While NASCUS understands that the current crisis has motivated NCUA to move swiftly, NASCUS also reminds NCUA that under the Federal Credit Union Act, the agency is required to consult with state credit union supervisors on [capital] matters,” Ito said Thursday in a press release. NASCUS has frequently called for the structure of the NCUA board to be amended to require at least one member with experience working within the state credit union system.

In other actions, the board approved a proposed rule that provides an alternative to fully executed signed signature cards for satisfying the insurance requirement for a joint account. Under the proposed rule, in lieu of a signed signature card, the requirement could be satisfied by evidence the credit union issued a debit card or other means of accessing the account to each co-owner.

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Law and regulation Compliance Overdrafts Deposit insurance Loss mitigation NCUA Coronavirus