Section 1 – Truth in Savings/Ncua Part 707
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SECTION 1 – TRUTH IN SAVINGS/NCUA PART 707 © 2018 CUNA DEPOSIT ACCOUNT REGULATIONS 1-1 Section 1 – Truth In Savings/NCUA Part 707 Overview Coverage Credit unions are required to disclose to members fees, dividend and inter- Authority est rates, and other terms in connection with an account before an account is The Truth In Savings Act of 1991 opened, upon request, on periodic state- (TISA) was enacted in December 1991. ments, and upon subsequent events. The statute directed the Federal Reserve TISA also establishes rules for pay- Board (FRB) to implement regulations ment of dividends or interest and adver- for all depository institutions except tising rules for deposit accounts. credit unions. It also directed the National Credit Union Administration (NCUA) to issue regulations for state- NCUA Staff Commentary chartered and federally chartered credit On November 8, 1994, NCUA unions “substantially similar” to the issued its Official Staff Interpretation FRB Regulation DD (Reg. DD), taking (Commentary) to the Truth In Savings into account the unique nature of credit Rule (Part 707) incorporating much of unions and the limitations under which the Supplementary information issued they may pay dividends on member with Part 707 and addressing additional accounts. compliance questions. Good-faith compliance with NCUA’s Purpose commentary affords credit unions pro- tections from civil liability penalties. TISA is basically a disclosure law, the purpose of which is to enable consum- ers (credit union members and potential Credit unions members) to make meaningful compari- NCUA’s regulation applies to all sons of deposit accounts among deposi- federal and state-chartered credit tory institutions. unions whether federally or privately Truth In Savings imposes special insured, except corporate credit unions. disclosure requirements at five differ- (Regulation DD does not directly apply ent points in the life cycle of a deposit to credit unions.) account: 1) preaccount opening, 2) account opening, 3) periodic state- Covered accounts ments, 4) changes in account terms and account maturity, and 5) advertising. The following are covered accounts: • Traditional accounts such as: share, share draft, checking, and time deposits. © 2018 CUNA DEPOSIT ACCOUNT REGULATIONS 1-2 SECTION 1 – TRUTH-IN-SAVINGS / NCUA PART 707 • Dividend-bearing and nondividend- • Accounts of natural persons who, in bearing accounts. their professional capacity, hold the account for another (for example, • Insured and uninsured accounts (for attorney-client trust accounts and example, a jumbo certificate account trust accounts opened by a trustee as in excess of $100,000). a result of a formal written trust agree- • IRA accounts. ment). • Uniform Gifts to Minors Act (UGMA) • Nondeposit type accounts, such as or Uniform Transfers to Minors Act mortgage escrow accounts, construc- (UTTMA) accounts. tion loan accounts, discount brokerage accounts, and overdraft line of credit • Accounts held by deposit brokers (only accounts. for purposes of advertising rules). Members and potential members Accounts not covered by TISA NCUA defines account coverage The rule does not cover the following for members by a consumer vs. busi- accounts: ness purpose account distinction. • Accounts held by an unincorporated The term member under the final rule nonbusiness association of natural per- includes the following persons holding sons (club or organization accounts). an account primarily for personal, fam- Originally, NCUA had included club ily, or household (consumer) purposes: accounts opened after the effective (1) natural person (individual) members date as accounts covered by Truth In who hold a consumer purpose account, Savings. and (2) a natural person nonmember (individual joint owner). Members hold- • In the Riegle Community Development ing an account for a purpose other than and Regulatory Improvement Act of primarily for personal, family, or house- 1994, Congress amended TISA to hold (consumer) purposes and members exempt unincorporated association holding an account for another in a pro- accounts. fessional capacity would not be covered. Note: While club accounts are not For example, members holding covered, credit unions may find it accounts for corporations, partnerships easier to treat these accounts as cov- and, sole proprietorships or other busi- ered accounts rather than maintain- ness purposes would not be covered. ing two different procedures, one for Similarly, attorney-client trust accounts club accounts and another for all other and certain trust, estate, and court- accounts. ordered accounts would not be covered. • Sole proprietorship accounts because The term potential member is impor- such accounts are held for a business tant as the credit union must give cer- purpose. tain disclosures to “potential members.” The term includes a natural person with- © 2018 CUNA DEPOSIT ACCOUNT REGULATIONS 1-3 SECTION 1 – TRUTH-IN-SAVINGS / NCUA PART 707 in the credit union’s field of membership and quarterly). For some certificate or one eligible to become a member. accounts, the dividend period may be at Note: Similar to the coverage issues maturity. Credit union dividends are not for “accounts,” credit unions may also guaranteed. consider treating all members as cov- Note: In the commentary, NCUA ered members including members with makes the distinction between divi- business accounts. Again, compliance dend- and interest-bearing accounts by is easier with one set of account proce- emphasizing that federal credit unions dures. are only permitted to offer dividend- bearing accounts and only certain state-chartered credit unions may offer Rules Affecting Credit interest-bearing accounts. Union Accounts Interest-bearing accounts The nature of dividends In some states state-chartered credit One of the key differences between unions are permitted to offer interest- the Truth In Savings rules for banks and bearing accounts pursuant to state law; credit unions is the unique limitation on thus, the rule includes rules for pay- credit unions’ payment of dividends. ment of interest. (Check with your state Credit union dividends comprise the League to determine whether your state portion of available current and undivid- allows state-chartered credit unions to ed earnings of the credit union, which, offer interest-bearing accounts.) The by declaration of the board of directors, term interest means any payment to a is set aside for distribution to members member or to a member’s account for after required transfers to reserves. use of funds in the account of a state- Dividends cannot be guaranteed and chartered credit union under state law. members have no right to a dividend, For purposes of the rule, the term “inter- even on share certificates, unless avail- est” is generally substituted for the term able earnings exist and dividends are, in “dividends.” Like the term “dividends,” fact, declared for such accounts. “interest” excludes bonuses and similar The term dividends means any incentives. declared or prospective earnings on a member’s shares in a credit union to Rules governing be paid to a member or a member’s account terminology account. The term excludes bonuses, extraordinary dividends, and similar TISA requires the use of certain incentives. The dividend period is the basic account terminology to achieve time period, set by the credit union meaningful and uniform understand- board, at the end of which dividends are ing of accounts. In addition to the TISA earned and credited. The dividend peri- required terms, NCUA has imposed od may be different for different types of additional account terminology require- accounts (for example, weekly, monthly, ments. © 2018 CUNA DEPOSIT ACCOUNT REGULATIONS 1-4 SECTION 1 – TRUTH-IN-SAVINGS / NCUA PART 707 Required TISA terms — dividend rate, • The term Annual Percentage Yield APY, and APYE (APY) means the percentage rate TISA requires the disclosure of an reflecting the total amount of divi- accurate reflection of the effective rate dends paid on an account based on of interest. This effective rate of inter- the dividend rate and the frequency of est is known as the “annual percentage compounding for a 365-day period for yield” (APY) which is designed to permit share and share draft accounts or for a true comparison of deposit products the term of the account for term share among institutions. Credit unions are accounts. The APY assumes the princi- required to disclose earnings through pal amount remains in the account for the use of the terms: “dividend rate,” 365 days or the term of the account. “annual percentage yield,” and “annual Appendix A to the NCUA Rule sets percentage yield earned.” The APY dis- forth detailed computation specifica- closure is one of the most important fea- tions. tures of TISA and is required in the oral • The term Annual Percentage Yield rate disclosures, account disclosures, Earned (APYE) reflects the total renewal notices, and advertising. amount of dividends actually earned • The term dividend rate means the for the dividend or statement period as declared or prospective annual divi- a percent of the actual average daily dend rate paid on an account without balance in the account. The APYE is regard to compounding. “Prospective affected by additions and withdrawals rates” are rates set in good faith in during the period and is required for advance of the close of a dividend periodic statements only. The APYE period, which may be altered if suf- is calculated according to the formula ficient funds are not available or in provided in Appendix A to the NCUA the event of a superseding event such Rule. as a strike, plant closure, significant fluctuation in market rates and/or sig- Permissible account terms nificant change in financial structure, Credit unions are permitted to use the natural disaster, or emergency that following terms to describe accounts: alters the assumptions under which the “prospective rates” were made. • “Checking Account” for share draft The dividend rate used for account accounts disclosures and advertising is to be • “Money Market Account” for money rounded to the nearest basis point market share accounts (.01 percent) and disclosed to two decimal places (for example, 4.55%).