BANKS AND BANKING ‑- CREDIT UNIONS ‑- BILLS AND NOTES ‑- LEGALITY OF ALTERNATIVE CREDIT UNION SHARE DRAFT PROGRAM
The establishment and operation of an alternative share draft program, as herein described, by state‑regulated credit unions would not be prohibited by the provisions of RCW 32.12.260 as earlier construed and applied in AGLO 1977 No. 28 [[to Jim Matson, State Senator, on July 7, 1977, an Informal Opinion, AIR-77528]], dealing with a significantly different credit union "share draft" scheme.
- - - - - - - - - - - - -
September 29, 1977
Honorable Vernon L. Barnes, Director
Department of General Administration
218 General Administration Building
Olympia, Washington 98504 Cite as: AGLO 1977 No. 40
By recent letter you have made reference to AGLO 1977 No. 28 [[to Jim Matson, State Senator, on July 7, 1977, an Informal Opinion, AIR-77528]], relating to credit union share draft accounts, and in the light of that prior opinion have asked for our further advice with regard to the legality of a certain alternative proposal.
We respond in the manner set forth below.
The critical statutory provision to be noted, once again, is RCW 31.12.260 which reads, in its final paragraph, as follows:
"No credit union shall carry on a banking business or carry any demand, commercial, or checking accounts, nor issue any time [[Orig. Op. Page 2]] or demand certificates of deposit. Investments other than loans to members shall be made only with the approval of the board or of the investment committee." (Emphasis supplied)
In AGLO 1977 No. 28 [[to Jim Matson, State Senator, on July 7, 1977, an Informal Opinion, AIR-77528]], supra,1/ we initially described the particular share draft scheme with which we were there concerned as follows:
". . .
"Under the share draft plan here at issue a member of a state regulated credit union, upon enrolling in the program, receives a supply of nonnegotiable draft forms. At the same time, a special savings draft account in the credit union is opened for the member which is separate from his regular share account. Then, later, when desiring either to make a withdrawal from his savings draft account, or to borrow against a preestablished line of credit (under an optional overdraft feature of the plan), the member may fill out and sign a draft form (bearing a definite physical resemblance to an ordinary commercial bank check) and deliver it to a third party ‑ possibly a merchant, a bank or merely a friend. Or, alternatively, the member may execute and present a draft directly to the credit union for payment from his savings draft account. Likewise, in the event that the draft is initially delivered to a third party, either as a bearer instrument or one which has been made payable to the order of such party, it may then either be presently directed to the credit union for payment or transmitted through banking channels.
"Savings drafts may be used to pay for goods and services or to exchange for cash. Under the plan there is no limit upon the amount of any given draft except that it may not exceed the available balance in the member's special savings draft account unless a preauthorized loan plan, allowing optional overdrafts, has been approved by the credit union involved. If a member desires [[Orig. Op. Page 3]] funds to be transferred from his regular share account to his savings draft account he must request that this be done before writing drafts on those amounts. If an overdraft occurs, a special notice will be sent to the member together with a specified charge per overdraft. If an overdraft has not been authorized, the draft will be returned to the payee marked nonsufficient funds (NSF) and a notice to that effect will be sent to the member.
"Another feature of the program to be noted is that stop payment orders may be submitted with respect to a particular draft or sequence of drafts. There will, however, be a charge for such stop payment instructions plus an additional charge for each stop payment per draft that is subsequently received and dishonored.
"Finally, under the share draft program in question it is the member who signs the draft ‑ just as in the case of a check drawn upon an individual's checking account with an ordinary bank. Thus, the draft is actually drawn by the credit union member upon his own special account with the credit union rather than being a form of check drawn by the credit union itself upon its own account with the bank in order to facilitate withdrawal by a member from his ordinary share account.
". . ."
We then advised that such a share draft plan as this would be violative of RCW 31.12.260,supra, because it would result in the carrying of checking accounts by those credit unions participating ". . . even though the special savings draft account involved is not expressly so labeled. . . ." Having so concluded in terms of that particular scheme, however, we then went on to stress, in a footnote appearing on page 3 of AGLO 1977 No. 28,
". . . that our present negative opinion is based upon the particular factual pattern [[Orig. Op. Page 4]] which is here involved. At the same time we can conceive of the possibility that something which might be labeled as a 'share draft' program could legally be fashioned in such a manner as to avoid the statutory obstacle which presently exists, by reason of RCW 31.12.260,supra, insofar as the plan to which you have directed our attention is concerned."
Thereafter, as you know, representatives of your office2/ and of the credit union association met with us on several occasions for the purpose of identifying such possible alternatives as would thus be legally acceptable to us. And, as a result, the particular plan upon which you have now requested our further opinion has now been formulated. In essence, that plan would be jointly established by one or more credit unions along with one or more commercial banks and, as it has been described to us, would operate as follows:
"1.Special Checking Account. The bank would establish a separate demand deposit, checking account for each credit union member taking part in the program. The account would be opened with an initial deposit of at least a minimum amount determined by the bank.
"2.Checking Account Agreement. In order to open the checking account, the member would also sign an account agreement ('signature card') with the bank. In addition to the standard bank provisions, the account agreement would provide for the following:
"(a) Authority for the bank to notify the member's credit union regarding any check presented against the account that would create an overdraft.
"(b) Authority for the bank to receive deposits to the account, on the member's behalf, directly from the credit union.
"(c) Nonreturn of paid (cancelled) checks to the member.
[[Orig. Op. Page 5]]
"3.Credit Union Authorization. Each participating member would also sign an agreement authorizing the credit union:
"(a) To receive notice from the bank whenever one of the member's checks is presented that would overdraw the member's account at the bank.
"(b) To treat that notice as a request by the member for a withdrawal out of the member's share account, in the amount of the net overdraft.
"(c) To treat that notice, alternatively, as a request for an advance against the member's open-end loan account at the credit union‑-if the member's share balance is insufficient to make the withdrawal without reducing shares below the $5.00 minimum required for membership.
"(d) If the request is granted, to make the appropriate accounting entries and to transfer funds out of the member's share or loan account to the bank, or
"(e) To notify the bank if, for any reason, the transfer cannot be made from the member's accounts at the credit union.
"4.Form of Checks. After the checking account has been opened, the bank will furnish the member with a supply of blank checks which are drawable on the bank.
"5.Duplicate Checks. The blank checks would be supplied in books of 20 or 25. Each check would be bound together with a carbonless duplicate copy beneath it. Each time a check is written, a copy would be automatically produced on the carbonless duplicate and retained by the member as a record of the check. If desired, a standard check register could also be supplied for recording checks and deposits.
"6.Bank Deposit Slips. Along with the blank checks, the member would receive a supply of standard bank deposit slips so that deposits to the checking account can be made, as the member desires.
[[Orig. Op. Page 6]]
"7.Use of Checks. A member will be able to use the bank account just like a standard checking account. Checks will be written to named payees to obtain goods or services or to pay bills. Checks can also be written and negotiated for cash. The checks are designed so that they will be cleared through the banking system in the usual fashion for presentment to the drawee bank.
"8.Presentment and Payment. Upon presentment of a member's check, the bank will determine whether it can be paid out of the member's checking account. If the account is sufficient, the check will be honored and paid in the usual manner.
"9.Overdrafts; Notice to Credit Union. In the event that a check would overdraw the member's checking account, the bank would notify the credit union as to the amount of the net overdraft. The bank would also provide such additional information (e.g. the member's account number, serial number of the check, etc.) as the credit union may require.
"10.Methods of Communication. Each business day the bank would send to the credit union (or the credit union's data processing center) a listing of all such overdraft check notices. Depending on volumes and distances, the listing would be either physically delivered on paper or magnetic tape or electronically communicated by phone line to a terminal or other device at the credit union or its processor.
"11.Credit Union Procedures. Upon receiving an overdraft notice for a member, the credit union would determine whether the net overdraft can be covered out of the member's share or loan accounts, according to the authorization previously signed by the member. (See paragraph 3.) Except as provided below, if either account is sufficient, the credit union will debit shares or advance a loan, as the case may be, and transfer funds to the bank. If neither account is sufficient, the bank will be notified so that the check can be dishonored and returned prior to the bank's applicable deadlines.
[[Orig. Op. Page 7]]
"12.Notice of Withdrawal. If the credit union has elected to exercise its right to require 90 days' advance notice of a share withdrawal (and if a loan disbursement cannot be made), the credit union will notify the bank that funds cannot be withdrawn from the member's share account at that time in order to cover the overdraft. The bank will be provided this notice in time for it to dishonor and return the check prior to its applicable deadline.
"13.Credit Union/Bank Settlement. Each day the credit union will transfer to the bank the aggregate amount for all net overdrafts it has covered with share withdrawals or loan advances. The transfer of funds can be accomplished through one of the following means:
"(a) By a debit to an account of the credit union at the bank.
"(b) By wiring funds to the bank.
"(c) By means of a preauthorized depository transfer check drawn by the bank against another institution where the credit union has an account.
"14.Member Statements. Each member will receive periodic statements from the bank and the credit union showing activity on the accounts involved in the program. Each check will be shown by its sequential serial number, and its amount and date of payment will be indicated.
"15.Interest and Dividends. The special checking accounts cannot, of course, pay interest. Share accounts subject to withdrawal through the program will earn dividend credit in the usual fashion. Since dividends are typically computed on a monthly or quarterly basis, no dividends would be paid on amounts withdrawn (through this program or otherwise) before the end of the dividend period.
"16.Nonreturn of Checks. Paid checks will not be returned to the member by the bank. However, the bank will retain a microfilm copy of the front and [[Orig. Op. Page 8]] bank of each check. If the member should need a copy to prove payment, one can be obtained from the bank. Nonreturn of paid checks will result in substantial operating economies which will be passed on to the member.
"17.Stop Payments. As with all other checking accounts, the member can stop payment on a check by notifying the bank, either directly or through the credit union."
We have carefully reviewed and analyzed this alternative plan and are of the opinion that it would be legally permissible under the applicable statutes governing state regulated credit unions for a credit union chartered in Washington to participate in the plan, so long as its bylaws were properly amended and approved by the Supervisor of Savings and Loan Associations. See RCW 18.104.22.168/ Particularly, we believe that the plan as above outlined would avoid the prohibitory language of RCW 31.12.260, supra, upon which we based our earlier opinion, for the reason that in this case it would clearly be the bank or banks involved, and not the credit union, that would be ". . . carrying . . . [such] checking accounts . . ." as would be utilized. Under that plan the instruments involved would unquestionably be "checks" but those checks would not be drawn on a credit union member's share account in the credit union; instead, they would be drawn upon his account in the participating bank or banks. That fact that no minimum balance would necessarily be required to be maintained by the member in his checking account would not [[Orig. Op. Page 9]] derogate from this conclusion because that would not alter the proper legal characterization of the account. Nor, in our judgment, would it be altered by the further fact that the credit union's name might also appear on the blank check forms (along with the name of the bank) or that those forms themselves might be provided to its members by the credit union (upon signing up for the plan) rather than directly by the bank itself.
We trust that the foregoing will be of some assistance to you.
Very truly yours,
PHILIP H. AUSTIN
Deputy Attorney General
JAMES K. PHARRIS
Assistant Attorney General
*** FOOTNOTES ***
1/Written to State Senator Jim Matson on July 7, 1977 [[an Informal Opinion, AIR-77528]].
2/Which has the responsibility, through the Division of Savings and Loan Associations, to regulate state chartered credit unions under chapter 31.12 RCW.
3/RCW 31.12.100(4) provides that the bylaws of a credit union may provide for and determine: ". . . the conditions on which deposits may be received and withdrawn; . . ." RCW 31.12.120 then provides, however, that:
"No credit union shall receive any deposits or payments on account of shares, or make any loans, until its bylaws have been approved by the supervisor, nor shall any amendments become operative until they have been so approved."