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NCUA-IR - 81-9 SHARE, SHARE DRAFT AND SHARE CERTIFICATE ACCOUNTS STATEMENT OF POLICY 11/81 TITLE 12 -- BANKS AND BANKING CHAPTER VII -- NATIONAL CREDIT UNION ADMINISTRATION PART 701.35 -- SHARE, SHARE DRAFT AND SHARE CERTIFICATE ACCOUNTS STATEMENT OF POLICY AGENCY: National Credit Union Administration (NCUA) ACTION: Statement of Policy SUMMARY: This policy statement sets forth the views of NCUA with respect to the calculation and assessment of premature withdrawal [penalties] penalities for share certificate accounts that have been issued with variable dividend rates and for share certificate accounts to which additions have been made subsequent to the date of issuance. EFFECTIVE DATE: Immediately upon publication. ADDRESS: Send comments to: Robert S. Monheit, Regulatory Development Coordinator, Office of the General Counsel, National Credit Union Administration, 1776 G Street, N.W. Washington, D.C. 20456. FOR FURTHER INFORMATION CONTACT: Robert Fenner, Deputy General Counsel or Ross Kendall, Staff Attorney, Office of the General Counsel, at the above address or telephone (202) 357-1030. SUPPLEMENTARY INFORMATION: Federal credit unions may pay variable dividend rates on share certificate accounts in at least three circumstances. First, effective August 1, 1981, the NCUA Board acted to remove any dividend ceiling for share certificate accounts opened after that date with maturities of four years or more. With respect to such certificates, therefore, Federal credit union may offer to pay whatever dividend rate they wish, including a variable dividend rate, provided required disclosures are made. Second, effective November 1, 1981, the NCUA Board removed the dividend ceiling for IRA and Keogh accounts. Thus, a variable dividend rate may be paid on these accounts as well. Third, with respect to other share certificate accounts with maturities of less than four years, the dividend ceilings set forth in subsection (h) of 701.35 still apply. With respect to such accounts, however, subsection (g)(ii)(A) of 701.35 provides that the dividend rate may be expressed as a percentage above or below the rate declared for regular share accounts. Thus, for example, where a certificate is issued with a three year maturity and its rate is to be 400 basis points above the rate declared for regular shares, it is conceivable that this rate will vary over the life of the certificate in relation to variations in the declared regular dividend rate. The purpose of this policy statement is to set forth the views of NCUA with respect to the calculation and assessment of premature withdrawal penalties for share certificate accounts that have been issued with variable dividends rates. A related issue has recently arisen concerning the assessment of the required minimum penalties on share certificate accounts to which additions have been made after the date the account was opened. Effective May 6, 1981, the NCUA Board ruled (46 F.R. 26275) that additions to share certificate accounts need no longer automatically reset the account's maturity provisions. As noted in the preamble to that rule, minimum penalties for premature withdrawal from such accounts remain in effect. This policy statement is intended to set forth the views of NCUA with respect to the calculation of the amount of the minimum penalty that must be assessed in the event of premature withdrawal from such accounts. Subsection (e) of 701.35 spells out the mandatory minimum penalties that must be imposed in connection with premature withdrawals from share certificate accounts. This subsection provides that, at a minimum, an amount equal to the lesser of 90 days of dividends on the amount withdrawn or all dividends on the amount withdrawn since the date of issuance or renewal must be forfeited as a result of a premature withdrawal from an account with a maturity of one year or less. For accounts with maturities of greater than one year, a premature withdrawal must at a minimum result in the forfeiture of the lesser of all dividends for 180 days on the amount withdrawn or all dividends on the amount withdrawn since the date of issuance or renewal. Where a share certificate has been issued at a stated dividend rate that will not vary over the term of the certificate, calculation of the minimum penalty in accordance with this formula is straightforward. Where, however, a certificate is issued at a dividend rate that fluctuates over its term, or where additions to an existing account have been made subsequent to the date of issuance, calculation of the penalty becomes more complex. This policy statement will help explain the methods and available options for Federal credit unions in this regard. IRPS 81-9 It is the view of the NCUA Board that, with respect to a share certificate account issued with variable dividend rates (i.e., a dividend rate that changes during the term of the certificate), subsection (e) of 701.35 may be interpreted in the following manner. Subsection (e) essentially calls for the forfeiture of a specified number of days worth of dividends in the event of premature withdrawal from the share certificate account. Where dividends have accrued over the specified period at several different rates, it is necessary to first select a single rate to apply to the amount prematurely withdrawn in order to calculate the amount of the penalty. In selecting this penalty rate, Federal credit unions may: (a) select the rate in effect on the date the account was opened; (b) select the rate in effect on the date of the premature withdrawal; or (c) calculate an average of the various rates in effect for the period the funds were on deposit. In calculating this average, the various rates must be weighted in accordance with the relative length of time each was in effect. It is the view of NCUA that any one of these three methods may be utilized. To ensure the enforceability of the method chosen, a clause specifically addressing this point should be incorporated into the account contract (i.e., the share certificate or other written document evidencing the terms and conditions of the account). It is also noted that the disclosures required by section 701.35(l) of NCUA's regulations include "The effect of premature withdrawal." To cost this disclosure requirement, Federal credit unions may wish to specify in their disclosure forms the precise method used to determine the applicable penalty rate on floating rate accounts, or they may wish to simply indicate that a substantial penalty will be incurred in the event of premature withdrawal. The latter type of disclosure is acceptable if the share certificate provides the details of the penalty method used. It is expected that the above methods will not be utilized by Federal credit unions in such a way as to render the mandatory minimum penalty provisions a nullity. Thus, the NCUA Board will consider a variable rate scheme in which the operative rate for calculation of the penalty is set unreasonably low to be an attempt at circumvention of 701.35(e). For example, where a variable rate certificate is issued with a provision establishing the effective rate on the date of issuance at zero in order that, pursuant to the first permissible option outlined above, no penalty need be applied, NCUA will consider such action a violation of the minimum penalty requirement of Section 701.35(e). With respect to share certificate accounts to which additions have been made subsequent to the date of issuance, NCUA interprets the premature withdrawal provisions of 701.35(e) to be capable of two equally supportable constructions in arriving at the appropriate amount of dividends that must be forfeited. Where additions to an existing account are made and some time thereafter a premature withdrawal occurs, one permissible construction is to hold that the withdrawal consists first of the funds added to the account most recently, then next most recently, and so on. Equally permissible is a construction that deems any premature withdrawal to consist of funds that have been on deposit for relatively the longest periods of time. Obviously, the former construction will result in a smaller figure for purposes of calculating the minimum penalty called for by 701.35(e), since the dividends that have accrued on the amounts deposited most recently will be the smallest. In the view of the NCUA Board, Federal credit unions may adopt either construction. The considerations outlined in the preceding paragraph concerning notice to account holders apply, equally in this context. By the National Credit Union Administration Board on November 18, 1981. ROSEMARY BRADY |