Compliance Blog

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel, NAFCU

A frequently-asked question that the Regulatory Compliance Team sees is how long a credit union has to deal with a deposit account with a negative balance. The answer depends on what you mean by “deal.”

FCU Overdraft Policies: The 45-Day Rule

If a federal credit union advances money to members to cover account deficits without having the borrower complete a loan application, the FCU must comply with paragraph 701.21(c)(3) of NCUA’s rules and regulations. Specifically, the FCU must establish a policy that:

• Sets a cap on the total dollar amount of all overdrafts that the FCU will honor (consistent with its ability to absorb losses);
• Establishes a time limit not to exceed 45 calendar days for the member to deposit funds or obtain a loan to cure the deficit;
• Limits the dollar amount of overdrafts the FCU will honor per member; and
• Establishes any fee or interest rate charged for overdrafts.

In other words, a federal credit union is required to have a policy that obligates members with negative balances to make arrangements to repay a negative balance. Those arrangements could involve simply making a deposit to bring the account balance into the black, it could involve a repayment agreement, or it could involve a conversion of the negative balance to a loan. Note that if a repayment agreement meets the definition of a loan under Regulation Z regarding finance charges and the number of payments and exceeds the dollar amount thresholds it may be subject to Regulation Z's disclosure requirements. See, 12 CFR § 1026.1(c); comment 1026.3(b)-3. The comment to NCUA’s AIRES overdrafts questionnaire on this provision states that “[u]sually, loans should be repaid in less than 30 days.”

However, whatever the arrangement, the credit union’s policy must establish a timeframe -- 45 days or less if the credit union choses – by which the negative balance must be fully resolved by the member.

Overdraft Charge-Offs: The 60-Day Guidance

If a credit union is unable to come to an arrangement with the member, then the credit union may need to consider charging the negative balance off. In 2005, NCUA joined with other regulators in Interagency Guidance on Overdraft Protection Programs, which was disseminated as an attachment to NCUA Letter to Credit Unions 05-CU-03. In that guidance, NCUA states that “overdraft balances should generally be charged off when considered uncollectible, but no later than 60 days from the date first overdrawn.”

Note that the expectation is that once the credit union has determined that the amount is uncollectible under its own policies, the amount should be charged-off even if it is before that 60-day timeframe. If that determination has not been made, it should be charged off by day 60 after the overdraft, regardless.

The guidance also specifies that if the amount is deemed uncollectible and charged-off, any payments received afterwards, for example, if the member shows up and deposits funds on day 44 or suddenly starts repaying under a repayment plan, should be reported as a recovery.

After this guidance was issued, a credit union wrote to NCUA’s Office of General Counsel for their legal opinion on whether these two timeframes were in conflict. In Legal Opinion Letter 2005-0702, NCUA stated that “The two provisions trigger different actions and, therefore, are not inconsistent.” Ultimately, these two time-frames answer two separate questions. The 45-day timeframe sets the period during which the credit union should work with the member to resolve the issue. The 60-day timeframe speaks to an internal accounting issue at the credit union. So depending on whether the person trying to deal with the negative balance is asking from an accounting perspective or a member-facing perspective, the answer may differ.