A regulation that federal credit union officials say they didn't want to adopt will cost the industry roughly $250 million in 1995 and about $180 million every year thereafter, according to Robert M. Fenner, general counsel for the National Credit Union Administration.
The Sept. 9 rule implements the Truth-in-savings Act passed by Congress in 1991. A key program vision of the agency rule bans "rollback accounts," which calculate interest based on the lowest balance in an interest period.
They are used by up to 7.1% of the industry.
Costly Changes
Replacing the rollback accounts will force credit unions to implement new accounting systems, institute compliance programs, and print up disclosure forms for new accounts, creating a substantial cost, Mr. Fenner said.
The NCUA argues that it had no choice but to eliminate the accounts. The industry believes, however, that the agency went overboard in interpreting the Truth-in-Savings Act.
Before voting, board member Robert Swan, speaking as a former credit union manager, called the decision the second-toughest one he had to make on the board, after the decision to build the new headquarters.
Appearances Matter
Some credit unions will have considerable cost in implementing the new regulation, he said. But, he said, "This is a mandate from Congress. The other regulators have complied. it would have us stand out if we didn't. comply. I don't think it's well for a federal agency to do that, and in the long run I think we would have lost the battle."
The board pushed back the regulation's effective date to Jan. 1, 1995, from July 1, 1994, to aid affected institutions - particularly small ones that lack the computers and personnel to calculate interest according to average daily balance or daily balance, the two methods now allowed by the NCUA.
Although normally the NCUA regulates only federally chartered or insured institutions, Congress directed the agency to draft a regulation for the entire industry. The agency will work with state regulators to ensure compliance.
The NCUA had no choice but to ban rollbacks and par value accounts, argued Robert M. Fenner, general counsel for the agency.
Rules Called Clear
He pointed out that the Truth-in-Savings Act explicitly states that institutions must pay interest on the daily balance. Because rollbacks don't do this, they had to g0.
Par value accounts, which pay interest on increments of par value, usually $5, also were prohibited.
Also, because interest for rollbacks is calculated in such a different way from daily balance methods, comparing rates for the two was virtually impossible.
"One of the purposes of the law, that of enabling consumers to comparative shop [among interest rates], and based on that make informed choices is defeated if one type of institution offers" rollback accounts, Mr. Fenner said.
Unpopular Regulation
Neither credit unions nor the leading trade groups like Mr. Fenner's and the agency's conclusion.
The final rule "is regrettable to me," said Thomas Hughes, president of Merrifield, Va.-based Navy Federal Credit Union. The nation's largest credit union, with $7.7 billion of assets, Navy maintains a rollback savings account and a daily balance checking account.
"The cost of man-hours and data processing are going to set us back a whole lot of money," he said. "And that hurts our members."
Mr. Hughes also said that eliminating rollbacks is unfair to customers who keep money in the accounts for the high interest rates.
"To take away an option from the consumer isn't a good idea. Let him make his mind up," Mr. Hughes said.
Another Dissenting Voice
Ralph Swoboda, president of the Credit Union National Association, the industry's largest trade group, also voiced disapproval.
"We had urged NCUA to include authority for rollback and counts, accompanied by full and fair disclosure of how these accounts work," he said in a statement. "We continue to believe that credit unions and not the at federal government should decide which accounts are in the best interests of credit union members."
Mr. Swoboda also expressed concern for smaller credit unions that still rely on hand posting to calculate interest
Paramount Baptist Church Credit Union in Washington, D.C., is one of about 1,500 such institutions. And although the changes are a nuisance for Navy Federal, they are all but overwhelming for the 300-member institution, which has $30,000 of assets.
"It most definitely will be a problem," said Florence Taylor, the institution's treasurer. "I don't know what we're going to do."
Staffed by Volunteers
Paramount Baptist has an all volunteer staff that "doesn't have time to calculate interest daily," and the institution doesn't have the money to hire new staff, she said.
The NCUA will help such institutions as much as it can, said compliance officer William Ryan.
"We're going to identify the credit unions most affected and give all the assistance we can to bring them into compliance," he said. "We're going on the road to train not only examiners, but the credit unions."
The regulator will also help industry trade associations bring the institutions into compliance, he said. Granting fixed-asset waivers if equipment needs to be purchased for compliance reasons is also being considered, he said.
Education Drive
CUNA and the National Association of Federal Credit Unions also have plans to educate institutions about compliance with Truth-in-Savings.
The final rule does appease Congress, bankers, and consumer groups, all of whom were critical of a previous draft that retained rollbacks.
"By eliminating rollbacks, they did what we want," said a staff member of the House Banking Committee.
In July, the House Banking Committee chairman, Rep. Henry Gonzales, D-Tex., sent a letter to NCUA chairman Roger Jepsen urging him to eliminate the accounts.
Bankers, Activists Cheer
Bankers and consumer interest groups are also heartened, but with reservations.
"We're glad to see they eliminated rollbacks," said Virginia Stafford, spokeswoman for the American Bankers Association. "But the implementation time seems too long."
Banks and thrifts were given nine months to comply with the Truth-in-savings rule drafted for them by the Federal Reserve Board. However, Mr. Fenner said, the act didn't say how long of an implementation period was required.
Ed Mierzwinski, consumer program director of U.S. Public Interest Research Group, which had opposed the previous draft, agreed with bankers that the implementation period was too long, but said the elimination of rollbacks will improve the industry's already good image.
