Compliance Blog

Written by Steve Van Beek

We have had quite a few questions related to the final rule for noninterest-bearing transaction accounts.  I wanted to highlight one - when the second disclosure would be required - because the final rule doesn't provide a good example.  My Tuesday blog post also did not fully discuss this issue (that post has been updated).  

The language in 12 C.F.R. 745.14(c)(2) is as follows:

"(2) If an insured credit union uses sweep arrangements, modifies the terms of an account, or takes other actions that result in funds no longer being eligible for full coverage under this section, the insured credit union must notify affected members and clearly advise them, in writing, that such actions will affect their share insurance coverage." (emphasis added).

Thus, if the credit union takes an action that would result in certain accounts no longer being fully insured - the credit union would need to notify these members.  The notice would need to inform the members that their accounts will no longer qualify for unlimited share insurance coverage.  NCUA addresses this in preamble to the final rule:

"The second notice requires insured credit unions to notify members individually of any action they take to affect the share insurance coverage of funds held in noninterest-bearing transaction accounts. Although this second notice requirement continues to be mandatory in the final rule, it is noteworthy that NCUA does not impose specific requirements regarding the form of the notice. Rather, NCUA expects insured credit unions to act in a commercially reasonable manner and to comply with applicable state and federal laws and regulations in informing members of changes to their account agreements."

This notification is different than the Section 745.14(c)(1) notice that must be posted on the credit union's website and in its branches.  This second notice needs to be sent when the credit union takes an action.  What kind of action?

The proposal to the new regulation includes the best example I've found:

"Under the proposed notice requirements, if an insured credit union modifies the terms of its account agreement so that the account may pay dividends, the insured credit union must notify affected members that the account no longer will be eligible for full share insurance coverage as a noninterest-bearing transaction account. Though such notifications would be mandatory, the proposed rule does not impose specific requirements regarding the form of the notice. Rather, NCUA would expect insured credit unions to act in a commercially reasonable manner and to comply with applicable State and Federal laws and regulations in informing members of changes to their account agreements." (emphasis added). 

In this example, the credit union beginning to pay dividends on the account means the account no longer meets the definition of "noninterest-bearing transaction account" and would no longer be fully insured.

In short, this second disclosure would be required when the credit union takes an action which results in an account losing its unlimited share insurance coverage.  In those situations - such as when the credit union starts to pay dividends on the account - the credit union would need to notify those account holders in writing that their accounts are no longer fully insured.  Those accounts would then be insured under NCUA's regular share insurance rules because they would no longer be "noninterest-bearing transaction accounts." 

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Have a wonderful, long holiday weekend!  See you Tuesday.