C a t a l y s t C o r p o r a t e F e d e r a l C r e d i t U n i o n SHARE DRAFT PROGRAM. Prepared by

Transcription

1 C a t a l y s t C o r p o r a t e F e d e r a l C r e d i t U n i o n SHARE DRAFT PROGRAM Prepared by Catalyst Corporate Federal Credit Union (800)

2 SHARE DRAFT PROGRAM TABLE OF CONTENTS Introduction Benefits of the Share Draft Program Requirements and Recommendations Preparation Operational Specifications Destiny of a Share Draft Sample Board Policies Member Qualifications Opening the Share Draft Account Fraud and Forgery Closing Summary

3 INTRODUCTION Share Drafts have become an important part of the credit union package of services for millions of members. During their brief history, share drafts initiated a financial revolution whose end result was nationwide--that is, interest paying checking accounts. The Payment Systems division of Catalyst Corporate Federal Credit Union, was established in 1980 to process share drafts for credit unions, and is now the largest credit union share draft processor in the nation. We are currently processing for more than 700 credit unions in various states across the nation, clearing close to eighteen million items each month.

4 BENEFITS OF CREDIT UNION SHARE DRAFT PROGRAMS CUNA nationwide studies* show that members who have credit union share draft/checking accounts are more likely to use just about every credit union service you can offer. Here's strong supporting evidence why it's so important to increase share draft penetration. Member households with credit union share draft accounts are: * More than 5 times more likely than member households WITHOUT share drafts to use your credit union for direct deposit * More than 4 times more likely to say your credit union is their primary financial institution (PFI) * More than 3 times more likely to use your credit union for audio response services as well as ATM and Debit card services. * More than twice as likely to use your credit union for Visa, MasterCard, certificates of deposit, individual retirement accounts, investment planning, retirement planning, term life insurance, and home equity loans * More likely to use your credit union for loans, such as first mortgages; second mortgages; vehicle, personal, or business loans; and payroll deduction for loan payments and * More likely to use your credit union for savings, money market accounts, club accounts, U.S. savings bonds, payroll deduction for savings, and financial and life insurance planning. *Results of the CUNA National Member Survey

5 REQUIREMENTS ABA/ROUTING & TRANSIT NUMBER DATA PROCESSING SOFTWARE MODULE OR SERVICE PROVIDER TO ACCOMMODATE SHARE DRAFT DATA PROCESSING SIGN CATALYST CORPORATE SCHEDULE A TO THE MASTER AGREEMENT AND OTHER SET UP FORMS FOR SHARE DRAFT PROCESSING SERVICE LINE OF CREDIT WITH CATALYST CORPORATE IN ORDER TO PERFORM DAILY TOTAL SETTLEMENT OF YOUR MEMBERS DRAFTS CATALYST CORPORATE S TRANZACT SERVICE TO DOWNLOAD POSTING FILES, VIEW IMAGES, AND PERFORM OTHER RELAVENT FUNCTIONS ADDITIONAL INSURANCE COVERAGE IS NECESSARY TO OFFER A SHARE DRAFT PROGRAM AND CUMIS RECOMMENDS THAT THE CREDIT UNION HAVE A SAFE OR VAULT IF KEEPING CASH AT THE CREDIT UNION RECOMMENDATIONS AT LEAST TWO PEOPLE ON STAFF AT THE CREDIT UNION, ONE OF WHICH SHOULD BE PREPARED TO DEDICATE HALF OF THEIR TIME TO THE PROGRAM (POSTING DAILY SHARE DRAFT TRANSMISSIONS, PROCESSING RETURN ITEMS, OPENING THE ACCOUNTS, ETC.) PERFORM DAILY SHARE DRAFT POSTING AND RETURN ITEM FUNCTIONS WITH RESPECT TO AND IN OBSERVANCE OF THE FEDERAL RESERVE BANKS OPERATING SCHEDULE/HOLIDAY SCHEDULE

6 SHARE DRAFT SERVICE PREPARATION 1. OPERATIONAL AND PROGRAM SPECIFICATIONS - NCUA requires that the specifications be kept in your files. Please be certain your program is described correctly and attach your policies on opening and closing accounts. 2. INSURANCE - You should maintain insurance to cover forgeries and all other risks arising from offering a share draft program. 3. DISCLOSURE STATEMENT disclosure statements for share drafts account services should be available through your credit union league 4. LIQUIDITY RESERVE Refer to the Federal Reserve System s Regulation D to determine the reserve requirements with which the credit union may be required to comply. 5. ACH PROCESSING - This should be an important consideration for your credit union when starting the share draft program. The ability of your credit union to honor direct deposits increases the potential to open more accounts and attract additional funds. 6. EDUCATION AND TRAINING - your staff should be informed on the process of opening and handling share drafts accounts and responsibilities. We recommend that you visit other credit unions offering share drafts and that your staff participate in a share draft operations educational seminar, which Catalyst Corporate conducts regularly. 7. DAILY OPERATIONS - to be conducted each and every banking business day, as determined by the Federal Reserve System s holiday schedule, include: - Process the return-item notification to Catalyst Corporate for previous day s exceptions with return reasons such as Insufficient Funds (NSF), Stop-Payment, Closed Account, etc. - Posting of current daily transmission file - Reviewing the daily exception report and addressing each exception item that won t post to members accounts for any of various reasons by deciding to force post, or return the item the next business day Additional responsibilities will include: - Opening new accounts and using this opportunity to cross-sell other credit union services - Fulfilling requests for copies of cleared drafts and stop-payment requests - Processing notices of overdraft, whether paid or returned not paid - Handling issues with lost, stolen, and forged drafts - Closing accounts

7 SHARE DRAFT PROCESSING OPERATIONAL SPECIFICATIONS A) SHARE DRAFT AGREEMENT - Each member opening a share draft account should sign a share draft agreement. Consult your credit union league or your credit union s legal counsel regarding the preparation of an agreement that complies with state laws. B) SHARE DRAFT ACCOUNT - Credit union should establish a separate "share draft account" for members who choose share draft service. All drafts written by the member will be charged against the member's share draft account. C) DRAFT PRINTING -The name and address of the credit union, the name and address of the member, the draft serial number, and the credit union s Routing & Transit Number in fractional format will be preprinted on the face of each share draft. D) MICR ENCODING Members share drafts will be pre-encoded along the bottom edge of each draft in accordance with the Magnetic Ink Character Recognition (MICR) standards for the handling of cash items as specified by the Federal Reserve System with the following data: the credit union s ABA Routing and Transit Number ( R&T number), the members share draft account number, and the serial number of the share draft. E) TRUNCATION The original document of the paid share drafts are not returned to the member nor to the credit union. Each business day, Catalyst Corporate will prepare an electronic data file containing the paid date, member account number, dollar amount and serial number of each share draft received for presentment to the credit union that day. This file will be transmitted to the credit union's office or to its designated data processor, or the credit union may download the file through TranZact. Upon receipt, the data file will be posted by credit union or its data processor to charge share draft withdrawals against the members' accounts and any overdrafts will be noted on an exception report. If the credit union decides to dishonor any exception drafts (e.g. for insufficient funds, stop payment order, closed account, misrouted item, non-negotiable item, etc.) it should notify Catalyst, according to operational procedures, so that the draft(s) can be returned prior to the deadlines established by Catalyst to comply with applicable law and Federal Reserve regulations. F) STOP PAYMENTS - A member may stop payment on a draft by giving the credit union a written stop payment order. To be effective, a stop payment order must be received in a timely manner so that the credit union has a reasonable opportunity to act on the order prior to its deadline for dishonoring the draft.

8 SHARE DRAFT PROCESSING OPERATIONAL SPECIFICATIONS (continued) G) OVERDRAFTS - The credit union will record all share overdrafts, including overdrafts that are dishonored and those that are paid through proceeds of a loan or by means of a transfer from another share account of the member. According to regulation, the credit union will promptly notify the member whenever an overdraft occurs. Such notice will identify the draft overdrawing the share draft account by serial number, date received, and amount. H) OVERDRAFT PROTECTION - If an overdraft is honored by transfer from an Open-End Line of Credit, it will be necessary to prepare an Open-End Voucher and include a copy of the voucher with the notice of overdraft that you provide to the member. I) PERIODIC STATEMENTS No less frequently than monthly, the credit union must provide a statement of account to each member who has a share draft account. The statement will show the serial number, dollar amount and the date of payment for each share draft that was paid during the period covered by the statement. J) DETECTION OF UNAUTHORIZED DRAFTS - Each member will be responsible for the detection of unauthorized or forged drafts as it is not practical for the credit union or Catalyst Corporate to verify the authenticity of signature for every draft processed. Member responsibility for draft verification will be accomplished as follows: 1. The credit union will immediately provide member with a notice of any/all overdrafts and member will have the opportunity to notify the credit union of any unauthorized drafts that may be included among such overdrafts. 2. The member must notify the credit union of any unauthorized drafts discovered on the periodic monthly statement of share draft account. 3. When the credit union receives notice of an unauthorized draft, a copy of the draft should be compared with the signature of the member. 4. Members will be responsible for reviewing the accuracy their monthly statement within 60 days of receipt notify the credit union of any unauthorized drafts. 5. As an additional protection against losses arising from unauthorized drafts, the credit union can obtain suitable share draft forgery insurance. K) IMAGES OF DRAFTS - A print of a processed draft will be provided directly to the credit union at credit union s request. The original document of paid share draft items will be retained by Catalyst Corporate for a minimum of thirty (30) days following the date of presentment. Catalyst Corporate will maintain a copy of the front and back of each processed share draft for up to seven (7) years.

9 SAMPLE BOARD POLICIES The Board needs to adopt a resolution authorizing the credit union to offer share drafts. The Board should participate in discussions and adopt policies in several specific operating areas. There are several things that must be done before you can offer share drafts to your members: The most common board policies include: 1. What type of share draft account will the credit union offer? All regulations and restrictions of a regular share account will apply to the share draft account. Also, determine if different dividend rates will be offered. 2. Who qualifies for use of share drafts? Will organizational or commercial accounts be accepted, assuming they qualify for membership? Are there minimum standards for personal members? 3. When will a member's share draft account be involuntarily closed? 4. What prices will be charged to members for draft printing, overdrafts, stops, copies, clearing fees or account maintenance fees? What minimum balances, if any, will be required to obtain the account for free? 5. What overdraft protection services should be offered? If transfers from other share accounts are permitted, the Board should adopt a policy limiting the transfers to three per month. This policy will prevent the credit union from having to hold reserves at the Federal Reserve on other share accounts under the provision of Regulation D.

10 MEMBER QUALIFICATIONS Areas to consider Check Reporting Service: It may be advantageous to use a service like Telecheck, which keeps track of all involuntarily closed checking accounts in a community. 2. Credit Check: Members who are delinquent on loans may have a higher probability of overdrawing a share draft account. A growing number of credit unions are reviewing credit reports before opening new share draft accounts. 3. Qualify for a Line of Credit: Approximately 25% of all credit unions require members to meet the same criteria that the loan department has established for opening a line of credit. Federally-chartered credit unions may not require the member to actually sign up for a line of credit as a condition of opening a share draft account. 4. Minimum Balance: Some credit unions request either a minimum initial deposit or a minimum balance be maintained in either the share or share draft account. 5. Direct Deposit: Although not necessarily a requirement to qualify for a share draft account, it is advantageous to both the credit union and the member. 6. Full-time employment or length of employment may be a valid consideration.

11 OPENING THE SHARE DRAFT ACCOUNT At least one staff person should be knowledgeable in the account opening procedures. Areas to be familiar with: 1. Disclosure statement 2. Board policies 3. Sample drafts and draft printer order forms 4. New account cards and explanation of the options 5. Deposit slips 6. Educational brochure 7. Sample statement 8. Preauthorized payment notification letter The new accounts representative is responsible for collecting pertinent information for the application, qualifying members for share draft accounts, and explaining the credit union's policies and procedures. This is an extremely important responsibility because the new accounts representative is in the best position to promote and cross-sell other credit union services while also screening out potential, future share draft account problems.

12 FRAUD AND FORGERY Fraud is where a person commits a crime by conducting a transaction on an account, but does not forge or use the account holder s name. Fraud exists because computer technology makes it easier to create drafts that appear to be authentic. Also, because criminals have developed creative techniques to alter the Payee name or dollar amount on the face of a draft Examples of fraud include: Creation of check or pre-authorized draft drawn on an account the Payer does not own and steals the use of someone else s account. Alteration of a check s Payee to whom the check is made payable to or the dollar amount that the check is made out for. Kiting a form of fraud whereby an individual writes checks drawn against balances credited to their account from checks that they previously deposited but which the credit union has not yet collected on. Forgery is where a person commits a crime by conducting a transaction by signing or endorsing the monetary vehicle, using the account holder s name or payee s name. Types of forgery include: Maker forging the account owner s signature on the maker s signature line on the front of blank checks that are found or stolen. Endorsement forging the payees signature, the signature of the name listed in the pay to the order line, on the back of the check in the endorsement area in order to collect the funds on a legitimately completed check that was obtained by theft. Maker forgery can occur as a result of a lost or stolen checkbook or a box of checks stolen from a mailbox. Another common method is the presentment of checks that have been stolen out of the back of one s checkbook - because it is less conspicuous and gives the criminal more time to commit acts of fraud/forgery before being discovered. (Often this type of crime has been committed by a friend or relative of the account owner and they therefore will refuse to follow through with signing affidavits and pressing charges.)

13 FRAUD AND FORGERY (continued): Credit Union s recourse: According to Regulation J, your credit union has 24 hours from the day of presentment to return the item regardless of the situation. After 24 hours has expired, the item may still be returned, but because it is considered a late return it may be dishonored and sent back to your credit union. When fraud/forgery is suspected prior to the item(s) being paid, you should: Place a stop payment on the item(s) Request a copy of the item when it is finally presented Have the member verify if item is unauthorized Return the item as Forged/Fraudulent within the 24 hour return window Have the member sign four Affidavits of Forgery 1. for Catalyst Corporate 2. for the credit union 3. for the member to provide to the merchant as proof 4. for member s records Consider closing the account depending on the probability of additional future risk When fraud/forgery is suspected after the item has paid, you should: Return the item as Forged/Fraudulent, however it most likely is late and may be refused Have the member sign four Affidavits of Fraud/Forgery 1. for Catalyst Corporate 2. for the credit union 3. for the member to provide to the merchant as proof 4. for member s records When your member notifies you of potential fraud/forgery and you notify Catalyst, Catalyst will immediately return the item at your request and provide provisional credit to the credit union, so you may provide provisional credit to your member and not have to manage the outage and incur float cost on the amount. If, however, the late return is refused by the bank of first deposit, the credit entry will be reversed from your Catalyst Corporate account. Credit Union Prevention: Encourage members to monitor their checking accounts daily via audio response or online banking. Incorporate check digit routines in members account numbers and software programs that use an algorithm to calculate the authenticity of the draft. Utilize software programs that assist with fraud detection by detecting kiting and inconsistencies in draft serial number orders.

14 CLOSING SUMMARY The members will begin to think of the credit union as a full service financial institution. The CUNA study shows what affect this could have on your credit union. Because we work exclusively for credit unions, we provide ongoing field support, training and assistance with regulatory compliance for your share draft program. We work for credit unions and appreciate your business.