Regulatory Compliance
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Dividends of Compliance

I recently spoke with a federal credit union that was interested in offering a product they would call “Interest Checking.”  It would be a standard checking account, but it would also pay a return on the funds in the account.  This would be a great product for consumers, and may help to expand the credit union’s membership.  However, I informed them that the name of the account may pose compliance risk, as the commentary to Truth in Savings Part 707.2(i) states that federal credit unions may only offer dividend bearing accounts.

1. General. Member savings placed in share accounts are equity investments, and the returns earned on these accounts are dividends. Federal credit unions may only offer dividend-bearing and non-dividend-bearing share accounts.  State-chartered credit unions may offer both share and deposit accounts if permitted by state law. State law, including without limitation regulations and official interpretations, will determine if returns earned in accounts in state-chartered credit unions are dividends.

Note: The final sentence in this citation explains that state-charted credit unions may offer interest as a return on the funds in a member’s account, depending upon state law.

The credit union planned to offer dividends as the rate or return, which would keep them in compliance with this section of Truth in Savings.  However, they felt that the term “Interest Checking” would be more easily understood by the average consumer.  While I could understand that perspective, this could pose risk under both Truth in Savings, and UDAAP as it may be inaccurate or misleading.  As explained in the commentary to Truth in Savings Part 707.2(p), dividends and interest are two very different types of return:

2. Differences between dividends and interest. Generally, dividends are returns on an equity investment (shares); interest is return on a debt investment (deposits). Dividends, in general, are not properly payable until declared at the close of a dividend period; interest, in general, is properly payable daily according to the deposit contract. Dividend rates are prospective until actually declared; interest rates are set according to contract in advance and are earned on that basis. Share accounts establish a member (owner)/credit union (cooperative) relationship; deposit accounts establish a depositor (creditor)/depository (debtor) relationship.

In the end, the credit union decided to revise the name, to avoid any potential compliance impact.  Fortunately, this was a proactive credit union, that engaged compliance early, before they had invested too much time or money into promotional efforts.  It was a great example of how including compliance in new product development can make the process go more smoothly for everyone involved.


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