BANKS AND BANKING ‑- CREDIT UNIONS ‑- BILLS AND NOTES ‑- LEGALITY OF CREDIT UNION SHARE DRAFT ACCOUNTS
The establishment and operation of a "share draft" program, as herein described, by state regulated credit unions is prohibited by so much of RCW 31.12.260 as provides that no such credit unions shall ". . . carry . . . checking accounts . . ."
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July 7, 1977
Honorable Jim Matson
State Senator, Minority Caucus
Route 2, Box 2311
Selah, Washington 98942 Cite as: AGLO 1977 No. 28
By letter previously acknowledged you have requested our opinion on a question which we paraphrase as follows:
If approved by the state supervisor of savings and loan associations, may a state regulated credit union organized and operating pursuant to chapter 31.12 RCW establish a "share draft" program under which members of the credit union would be permitted either to withdraw from their accounts or borrow against a preestablished line of credit by means of a procedure more particularly described below?
We answer your question in the negative for the reasons set forth in our analysis below.
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 defininte physical [[Orig. Op. Page 2]] 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 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.
As you have correctly noted in your letter, the share draft plan here involved was initially disapproved in a memorandum opinion (dated February 10, 1976) written to the state supervisor of savings and loan associations (who also regulates state chartered credit unions under chapter 31.12 RCW) by the assistant attorney general assigned to the division of savings and loan associations. Then later, by a further memorandum opinion dated July 20, 1976, the same [[Orig. Op. Page 3]] assistant attorney general withdrew his earlier objections and advised the supervisor that, with certain qualifications, share drafts could legally be offered by credit unions if approved by the supervisor. In neither of those memorandum opinions, however, was the impact of RCW 31.12.260 considered ‑ primarily because of the manner in which the question was there posed. Conversely, your present letter expressly refers to that statute and thus directs our attention, specifically, to the question of whether a credit union share draft program having the salient features which we have above described would be in violation thereof.
RCW 31.12.260 provides, 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 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."
The question presented is whether the type of share draft program above described is prohibited by this statute. In our opinion, there can be but one answer; namely, that any credit union establishing such a share draft program must be said, thereby, to be carrying a checking account within the common and ordinary meaning of that term ‑ even though the special savings draft account involved is not expressly so labeled. In view of all of the various features which we have listed in describing the plan, the share drafts themselves constitute "checks" and the special account is a checking account. Therefore such a plan, if established and operated by a state regulated credit union, would be in direct violation of the clear and unequivocal prohibition against credit union checking accounts which is contained in RCW 31.12.260.1/ And, obviously, the state supervisor [[Orig. Op. Page 4]] of savings and loans may not purport to sanction, by his approval, a course of action which is in direct violation of a state statutory prohibition such as this.
We trust that the foregoing will be of some assistance to you.
Very truly yours,
PHILIP H. AUSTIN
Deputy Attorney General
*** FOOTNOTES ***
1/In thus concluding, however, it is important to note and emphasize that our present negative opinion is based upon the particular factual pattern 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.